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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2002                                             
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from          to                                              

Commission file number 000-31019



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Argonaut Technologies, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 94-3216714                              
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS Employer
    Identification Number)

1101 Chess Drive

Foster City, CA 94404


(Address of principal executive offices,
including zip code)


(650) 655-4200

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.     þ

Indicate by check mark whether the registrant is
an accelerated file (as defined in Rule 12b-2 of the
Act).     o          Noþ

The aggregate market value of voting and
non-voting equity held by non-affiliates of the Registrant as of
June 28, 2002 was approximately $21.9 million based
the closing price of $1.14 per share reported on the Nasdaq
National Market reported for such date. The number of shares
outstanding of the Registrants common stock on
February 28, 2003 was 20,020,108 shares. The
determination of affiliate status is not necessarily a
conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12 and 13 of Part III are
incorporated by reference from the Registrants Proxy
Statement for the Annual Meeting of Stockholders to be held on
June 5, 2003.



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TABLE OF CONTENTS



|              |                                                                                                         |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                                       
|              | Item 2. Properties                                                                                     
|              | Item 3. Legal Proceedings                                                                              
|              | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|              | Item 6. Selected Financial Data                                                                        
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|              | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                    
|              | Item 8. Financial Statements and Supplementary Data                                                    
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                            
|              | Item 11. Executive Compensation                                                                        
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13. Certain Relationships and Related Transactions                                                
|              | Item 14. Controls and Procedures                                                                       
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 10.18
|EXHIBIT 23.1 
|EXHIBIT 99.1 
|EXHIBIT 99.2 



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ARGONAUT TECHNOLOGIES, INC.

FORM 10-K

INDEX

|               |  |                                                                                                    |    |      |    | 
|-------------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                    |    | Page
|               |  |                                                                                                    |    |     
|PART I        
|Item 1.        |  | Business                                                                                           |    |      | 2  | 
|Item 2.        |  | Properties                                                                                         |    |      | 14 | 
|Item 3.        |  | Legal Proceedings                                                                                  |    |      | 14 | 
|Item 4.        |  | Submission of Matters to a Vote of Security
    Holders                                            |    |      | 14 | 
|PART II       
|Item 5.        |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |    |      | 14 | 
|Item 6.        |  | Selected Financial Data                                                                            |    |      | 15 | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |    |      | 16 | 
|Item 7A.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |    |      | 33 | 
|Item 8.        |  | Financial Statements and Supplementary Data                                                        |    |      | 34 | 
|Item 9.        |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |    |      | 62 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                                 |    |      | 62 | 
|Item 11.       |  | Executive Compensation                                                                             |    |      | 62 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |    |      | 62 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                                     |    |      | 62 | 
|Item 14.       |  | Controls and Procedures                                                                            |    |      | 62 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                               |    |      | 63 | 
|Signatures     |  |                                                                                                    | 65 |     
|Certifications |  |                                                                                                    | 66 |     
|Exhibits       |  |                                                                                                    | 68 |     

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PART I

This annual report contains forward-looking
statements for purposes of the Private Securities Litigation
Reform Act of 1995, and it is the Companys intention that
such statements be protected by the safe harbor created thereby.
Examples of such forward-looking statements include statements
regarding future revenues, expenses, losses and cash flows, our
ability to be cash flow positive in the fourth quarter of 2003,
research and development activities and sales and marketing
initiatives such as our plan to concentrate our efforts in those
areas such as building our core consumables business, possible
future acquisitions, the anticipated effects of the acquisition
of Jones Group to our net sales performance and pre-tax
operating results, our plans to discontinue non-performing
consumable products and certain legacy instrument products, the
anticipated effects of our recent restructuring program and
related accruals, values of our assets and liabilities over
their remaining useful lives and our testing for impairment of
goodwill, and our expectations as to the duration of our
negative cash flows from operations and the sufficiency of
existing cash reserves for the next 12 months. Actual
results may differ materially from those projected in such
forward-looking statements due to various known and unknown
risks and uncertainties, including the risk that a decline in
the economy generally or the market for our products will
adversely affect our business, the risk that the market for our
products and services does not develop as anticipated, the risk
that we are unable to successfully integrate the product and
service offerings of the company we recently acquired and
successfully capitalize on anticipated synergies and growth
opportunities, and the risk that our restructuring programs do
not proceed as planned and that we incur unexpected expenses in
connection with the implementation thereof. For a further
discussion of these and other risks and uncertainties related to
our business see the discussion set forth herein under
Additional Factors That May Affect Future Results.






|        |         
|------- | --------
|Item 1. | Business

OVERVIEW

Argonaut Technologies, Inc. was incorporated in
the state of Delaware on November 10, 1994. We are a leader
in the development of innovative products designed to help
pharmaceutical chemists engaged in the discovery and development
of new chemical entities increase their productivity and reduce
their operating costs without compromising the scientific
integrity of their research. Pharmaceutical, biotechnology and
chemical industry organizations worldwide have implemented our
solutions to accelerate the development of new chemical
entities. Our chemistry consumables products allow scientists to
optimize their experiments, purify their materials and yield
better compounds than traditional consumable products used for
chemical synthesis. Our instrument products enable parallel
synthesis of new chemical compounds, allowing chemists to
perform multiple experiments under a variety of conditions in
much less time than other traditional chemistry development
methods would take. Our products automate many of the most
labor-intensive steps of chemistry development. By using our
chemistry consumables and instrumentation products, research
chemists are better equipped to address the increased demand for
new lead compounds to address the potential new wealth of
biological targets being generated by genomic and biotechnology
discoveries.

We began marketing our first product in 1996.
Currently, we market several different instrumentation product
lines (instruments and software), and a wide variety of
chemistry consumables. Through December 31, 2002, we have
sold our products to more than 1,200 customers in the
pharmaceutical, biotechnology, life sciences and chemical
research industries and have installed nearly 3,000 instruments
worldwide.

In March 2001, we completed the acquisition of
Camile Products, LLC, a privately held instrumentation and
software company in Indianapolis, Indiana, and renamed this
subsidiary Argonaut Technologies Systems, Inc.
(ATSI).

In February 2002, we completed the strategic
acquisition of Jones Chromatography Limited (and its wholly
owned subsidiaries: International Sorbent Technology Limited and
Jones Chromatography U.S.A., Inc.), a privately held chemistry
consumables and instrument company (Jones Group)
headquartered in Cardiff, Wales, United Kingdom.

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Our total business is currently unprofitable and
consumes cash because of its early stage of development and its
limited size and scale. We believe we will be cash flow positive
in the fourth quarter of 2003 if we can successfully implement
the many elements of our strategy.

INDUSTRY



| |           
| | ----------
| | Background

The pharmaceutical industry now faces even
greater financial pressure to deliver both growth and
profitability. One of the most significant issues affecting
those drivers is the productivity of research and development
(R&D) efforts. Specifically, traditional drug
discovery efforts have not increased the number of new drug
candidates, new genomics-based technologies will take longer to
exploit, and cost control initiatives are requiring more
scientific output with minimal additional resources. According
to the Pharmaceutical Research & Manufacturers of America,
R&D spending has more than tripled since 1990
($30.3 billion vs. $8.4 billion in 1990), 24 new dugs
were approved by the FDA in 2001 versus 30 in 1990. This
decrease in R&D productivity is further amplified by the
fact that drugs generating some $30 billion in U.S. sales
are expected to lose U.S. patent protection or other forms of
exclusivity over the next four years. With these current
realities facing the pharmaceutical industry, there is keen
awareness and justification for pharmaceutical companies to
improve productivity throughout R&D.

With the above challenges, and with competition
in the pharmaceutical industry increasing, many R&D
organizations have been exploring multiple strategies to enhance
success rates. Recent completion of the sequencing of the human
genome will provide an estimated 5,000 to 10,000 relevant new
drug targets over the next ten years, according to the
publication, Science. The expected large influx of
quality therapeutic targets will require greater efficiency in
all stages of chemical discovery and development. Due to the
high percentage of failed drug candidates, new strategies
utilize small molecules with sufficient protencies to validate a
new target before investing time and money on a faulty
therapeutic concept. Such demands have driven the development of
novel technologies, which enable chemists to produce more
relevant compounds at a greater rate than previously possible.



| |                                   
| | ----------------------------------
| | Chemical Discovery and Development

The process of discovering potential chemicals,
which could prove useful as new medicines, involves a number of
steps that can best be understood in the context of two phases:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Discovery Phase.Discovery is the process by which
    biologists and chemists organize drug targets identified through
    biology, including genomics, the study of gene function, and
    proteomics, the study of protein function, into biological
    screens. Chemists then test the millions of compounds produced
    by combinatorial chemistry using high throughput biological
    screens to identify possible compounds that interact with the
    drug target.
|
| |  | Development Phase.Chemists optimize the
    pharmacological (potency), pharmacokinetic (availability and
    specificity) and toxicology (safety) of chemical leads for human
    testing and approval during the development phase. The
    development phase can be further broken down into three stages:                                                                                                                                                                



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lead Identification.During lead identification, chemists
    evaluate the hundreds of potential lead chemicals that could be
    drug candidates which may emerge from the discovery phase using
    a specific process. Chemists perform successive rounds of
    chemical syntheses to create numerous variants of the drug
    candidates to find compounds likely to have appropriate drug
    properties. They then work to optimize these compounds for their
    biological potency, thus creating lead compounds.
|
| |  | Lead Optimization.In pre-clinical development, chemists
    further refine a limited number of lead compounds into clinical
    drug candidates by applying additional chemistry methodologies
    in the pre-clinical development process. During this process,
    chemists make relatively small changes to the compounds in order
    to optimize their safety and pharmacokinetic properties.                                                                                                                       

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Process Development.During clinical development, chemists
    test clinical drug candidates in humans to demonstrate their
    safety and effectiveness, or efficacy. The successful outcome of
    clinical trails may result in regulatory approval to
    commercialize the new drug product. During this phase of
    development, chemists optimize the methods by which they will
    manufacture much larger quantities of the compound being tested.
    Manufacturing process development involves optimizing the
    chemical synthesis process in order to yield much larger
    quantities of the drug than were needed in the previous
    development phases. By optimizing and selecting the most
    effective method of compound synthesis, chemists reduce the cost
    of synthesis. This may be achieved by reducing the number of
    products used in synthesis, improving the yield of the desired
    compound and reducing the time needed for synthesis.



| |                                                           
| | ----------------------------------------------------------
| | Traditional Chemistry Methods for Chemical
    Development

Chemists typically employ traditional chemistry
synthesis methods in their drug development efforts. Utilizing
traditional methods of chemical synthesis, a chemist performs a
series of chemical reactions, or transformations, until the
desired compound is obtained. Chemists generally achieve each
transformation in a four-part process:



| |                                 
| | --------------------------------
| | Set-up and Execution of Reaction

Chemists build a reaction apparatus as the first
step in chemical synthesis. Chemists often construct the
apparatus using a variety of traditional laboratory components
depending on the type of chemistry they are performing. Chemists
use the apparatus to combine chemicals, reagents and solutions,
which the chemist will often heat or cool to specified
temperatures under air and moisture-free, or inert, conditions.
The chemist then monitors reactions over time to determine
reaction progress. In traditional chemistry development, the
assembly of a specific apparatus and the periodic addition of
chemicals can often be very complicated and time-consuming
depending on the complexity of the desired reaction.



| |                
| | ---------------
| | Product Work-up

Chemists perform a product work-up as the second
step in chemical synthesis. Once the chemist determines that a
reaction has proceeded to completion, the chemist subjects the
reaction mixture to an extensive reaction work-up. During the
work-up the chemist stops the reaction and carries out an
initial cleanup of the reaction mixture prior to purification.
The chemist performs a series of washes with a variety of
solvents, a drying process and a filtration process during the
work-up. The chemist usually takes several hours to complete
this labor-intensive work-up process.



| |                     
| | --------------------
| | Product Purification

Chemists perform product purification as the
third step in chemical synthesis. During this step, the chemist
isolates the desired product from its starting materials and
various byproducts. Product purification is an integral step in
chemical synthesis due to the fact that impurities may interfere
in the next chemical transformation or mask a drugs
potency and toxicity. Chemists commonly use column
chromatography, which is a tedious technique. This product
purification step often takes the chemists days to complete.



| |                 
| | ----------------
| | Product Analysis

Chemists perform product analysis as the final
step in chemical synthesis. In this step, the chemist confirms
that the desired drug has been synthesized and isolated before
continuing on in the synthetic pathway or submitting the
compound for biological testing. A variety of biological tests
are performed on synthesized compounds. In many cases,
analytical chemists perform bio-analysis on serum extracts.
Bio-analysis supports investigations of compound activity,
pharmocokinetics, and toxicity. In recent years HPLC-mass
spectroscopy has become a standard tool for performing
bio-analysis. Bio-analysis with this tool utilizes serum
extracts obtained by sample preparation techniques, e.g., solid
phase extraction. Many thousands of bio-analytical

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samples are generated during the progression of a
drug candidate through pre-clinical and clinical trials.
Analysis requires a large amount of data collection and is
labor-intensive.


Chemists must repeat this laborious, four-step
process until the desired compound is obtained. In the Lead
Identification and Lead Optimization phase of a pharmaceutical
project, the development of a particular compound could take
months and even years to complete before researchers can
determine whether the compound has the desired drug properties.
In the later stage of Process Development, chemists not only
repeat this four-step process for every synthesis, but they must
analyze the reaction information to rapidly develop robust,
safe, cost effective and a scale-independent process for the
production of the new chemical compound.



| |                                                              
| | -------------------------------------------------------------
| | Limitations of Existing Chemical Development
    Technologies

Traditional chemistry development methods have
the following limitations:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Limited Productivity.Traditional methods are time
    consuming, inefficient and labor-intensive. Industry experts
    estimate that chemists can create approximately 100 compounds
    per year using the traditional approach of performing one
    reaction at a time. Since it is not economically feasible for
    customers to employ chemists in the large numbers necessary to
    take advantage of the thousands of expected drug targets, we
    believe that efficiency, or throughput in the development phase
    must increase dramatically.                                                                                                                                
|
| |  | Long Drug Development Timelines.Traditional methods require chemists
    to synthesize, purify and test compounds one at a time in an
    inefficient, sequential process. This results in long drug
    development timelines, which delay product commercialization and
    reduce the commercial value of the exclusivity period provided
    by patent protection.                                                                                                                                                                                                                                                                                                                      
|
| |  | High Cost.Traditional methods are expensive due
    to the time and labor required of a chemist to produce a single
    compound. In addition, companies utilizing the traditional
    methods incur the costs associated with the high volumes of
    solvents and chemicals utilized and the expense associated with
    their disposal.                                                                                                                                                                                                                                                                                                                                                  
|
| |  | High Rate of Drug Candidate Failures.Traditional methods limit the number
    of compounds synthesized, which can lead to companies or
    chemists selecting sub-optimal drug candidates, often resulting
    in drug candidate failures. These failures greatly increase the
    average length of time and cost required to bring a specific
    drug to market. If a drug candidate fails during clinical
    trials, a company must incur the time and expense of repeating
    all of the development steps or face abandoning the project
    altogether. The cost of a failed candidate increases
    significantly as it progresses to later stages of the
    development process.
|
| |  | Lack of Flexibility.To date, chemists have lacked flexible
    tools and systems to easily perform the wide variety of complex
    experiments required for chemistry development. Instead,
    chemists have had to repeatedly assemble various components into
    complicated systems, manually monitor the process and collect
    critical data to comply with corporate and governmental
    requirements.                                                                                                                                                                                                                                                                            
|
| |  | Difficulty of Use.The steps required for a chemist to
    put together an apparatus, perform the reaction, work-up,
    purification and analysis are cumbersome, time consuming and
    susceptible to human error. In addition, to design and
    successfully complete an experiment requires experience to
    determine the best protocols and methods to use. Therefore,
    traditional methods require the experience of skilled chemists
    with many years of training, yet the productivity of those
    chemists is handicapped by requiring them to spend time on
    trivial, manual tasks.                                                                                  

These limitations restrict the ability of
chemists in the pharmaceutical industry to efficiently identify
and produce new chemical compounds as potential candidates for
the large, increasing number of therapeutic targets that are
emerging from genomics and proteomics. In order to be
competitive in the pharmaceutical industry, we believe that
research and development organizations will need to increase
productivity, shorten the drug development process and spend
where they will get the greatest return on investment, as
measured by

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an increased number of drugs brought to market.
We believe that these objectives will be achieved through
advances and innovations in chemistry development technologies
and tools.


THE ARGONAUT SOLUTION

We design, manufacture and market chemistry
consumables and instrumentation products (instruments and
software) that increase the productivity of chemists, thereby
accelerating and improving the chemical development process, and
therefore, increasing the likelihood of developing a new drug
candidate. Our products enable rapid synthesis of a wide range
of compounds at a reduced cost. Our products also enable high
throughput bio-analytical evaluation of the potential drug
candidate against a wide variety of tests to evaluate potency,
selectivity, pharmacokinetics (what the body does to the drug)
and pharmacodynamics (what the drug does to the body). We design
and develop products using extensive customer assessment,
validation and testing. We intend to promote our products as the
laboratory standard for chemists and the industry standard for
companies seeking more efficient methods of addressing their
increasing drug development needs. We believe our technology
provides the following key benefits over traditional chemistry
development methods:



| |                       
| | ----------------------
| | Increased Productivity

We create products that simplify creation and
isolation of compounds. Chemists can create approximately 100
compounds per year using the traditional approach of performing
one reaction at a time. The same chemist can create between
1,000 to 7,500 compounds per year using our products to rapidly
synthesize and purify large collections of variant compounds
around lead candidates. During the course of lead generation and
lead optimization the purity of compounds undergoing biological
testing is paramount. Our flash chromatography instruments
facilitate this process with software selected chromatographic
conditions and purified compound collection. We offer the
associated columns with a variety of high quality sorbents to
achieve purification of the vast majority of compounds. The use
of our instruments in conjunction with our columns provides
productivity and performance enhancements compared to
traditional chromatography.



| |                                       
| | --------------------------------------
| | Reduced Drug Development
    Timelines

Our synthesis and purification products enable
chemists to focus their research and experimentation on the
design of promising lead candidates around a particular target,
avoiding the reliance on serendipity. Our purification
automation and consumables products speed the critical,
time-consuming step of product purification prior to biological
testing. Our sample preparation products enable the efficient
processing of large sample sets for bio-analytical studies, and
therefore, reduce the time to obtain biological test results. By
simultaneously producing (synthesizing, purifying and testing)
numerous variants of drug candidates, our tools provide more
comprehensive and timely information for research management to
make critical decisions through out the drug development project.



| |              
| | -------------
| | Reduced Costs

We believe that our consumable products provide
chemists with a wide variety of synthesis and purification
methodologies to address the demand to rapidly assemble highly
pure compounds in the early stages of chemistry development,
dramatically improving their productivity over traditional
methods. In addition, by synthesizing more drug candidates, our
products provide greater amounts of information and enable our
customers to abandon poor drug candidates sooner; thereby
eliminating the costs associated with later stage drug candidate
failures.



| |                                                                     
| | --------------------------------------------------------------------
| | Increase Probability of Success Early in
    the Development Process

Our advanced chemistry consumables allow chemists
to rapidly synthesize high quality compounds designed according
to themes of drug-likeness (drugs with a higher probability of
success in humans). This increased attention to physical
properties of compounds early in the drug development process
will increase the chance for success.

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| |            
| | -----------
| | Flexibility

Our products are flexible and chemists can
perform a wide range of chemical reactions, from simple
reactions to complex, multi-step reactions. As a result,
chemists are able to perform complex and difficult reactions
more easily, thereby encouraging innovation on the part of
chemists.



| |            
| | -----------
| | Ease of Use

Our systems are designed to make the
labor-intensive steps of performing the synthesis, work-up,
purification and product analysis faster and easier for
chemists, and can be operated by chemists with minimal product
training.

OUR STRATEGY

Our objective is to become the leading provider
of chemistry solutions that accelerate the development of new
chemical entities primarily in the pharmaceutical industry. To
attain that objective, we will leverage our unique strengths to
provide novel, high value tools that improve the productivity of
chemists in all stages of chemical development. To ensure that
we meet that objective, we have implemented the following
strategy:



| |                                       
| | --------------------------------------
| | Focus on the Pharmaceutical
    Market

We are focused on the large and fast-growing
sector of drug development within the pharmaceutical market. We
have targeted leading pharmaceutical, biotechnology and life
sciences companies as well as academic institutions for our
principal marketing efforts. We believe that these customers
provide the greatest opportunity for maximizing the use of our
products and that early adoption by these industry leaders and
academic institutions will promote wider market acceptance of
our products.



| |                                              
| | ---------------------------------------------
| | Expand Our Chemistry Consumables
    Business

We will continue to invest in our proprietary
consumables business, which includes synthesis and purification,
flash chromatography and bio-analytical products. In 2003, we
will concentrate our research and development, and sales and
marketing resources on building up this core business and
exiting non-performing consumable product areas.



| |                                                                    
| | -------------------------------------------------------------------
| | Focus Our Instrument Business on the
    Process Development Market

We will focus our instrument business on the
needs of pharmaceutical process chemists who are under increased
pressure to scale-up the production of new lead candidates to
support pre-clinical testing and trials. Leveraging our
proprietary Camile TG® software, we will deliver a line of
laboratory instrumentation products that address the workflow
and reporting requirements of the process chemist in the
pharmaceutical industry. Accordingly, we are discontinuing
further development and manufacturing of several of our legacy
instruments that address the discovery market. However, we will
continue to provide service to our instrument customers pursuant
to our contractual obligations and to ensure their continued
satisfaction.



| |                                                             
| | ------------------------------------------------------------
| | Continue to Invest in Product Development
    Collaborations

We are continuing to invest in collaborations
with pharmaceutical companies and technology suppliers to
deliver new, novel chemistry solutions to enhance the ability of
chemists to rapidly discover and develop new drug candidates.
Through these collaborations, we will invest in product
development programs that represent a significant advance in
technology and that address unmet customer needs. In addition,
we intend to selectively in-license and commercialize technology
that can enhance our total product portfolio.



| |                                                             
| | ------------------------------------------------------------
| | Build Global Customer Relationships Through
    Direct Sales

Our marketing approach is based on a thorough
understanding of our customers specific chemistry needs,
which we develop through the close interaction of our direct
sales and applications support personnel

7



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with our customers. Currently, we have 21 sales
people and 10 field and service specialists supporting our
customers worldwide. We now have a strong, direct presence in
the US and the rest of the world which is reflected in our 2002
revenue mix (54% US and 46% international) and which correlates
to the global worldwide pharmaceutical research market. With
this dedicated team of professionals, we are able to build long
term relationships with existing customers, gain access to new
accounts and expand into new geographic territories.




| |                                     
| | ------------------------------------
| | Acquire Complementary
    Businesses

We may pursue opportunities to expand our core
business by acquiring businesses that have technologies or
capabilities complementary to ours. In March 2001, we completed
the acquisition of ATSI, formerly Camile Products, LLC. In
February 2002, we completed the acquisition of the Jones Group.
We may acquire additional companies that provide synergistic
solutions to our customers need to accelerate the
chemistry development process. In addition, we may explore our
options regarding acquiring distribution channels in specific
geographic regions to speed our market penetration.

PRODUCTS

Argonaut provides chemistry consumables,
instrumentation (instruments and software), and services to
enable chemists primarily in the pharmaceutical industry to
accelerate the chemical development process and to increase the
number of successful new chemical entities.



| |                      
| | ---------------------
| | Chemistry Consumables

Our chemistry consumables products comprise
approximately 42% of 2002 net sales. Our high value, chemistry
consumables are essential to the challenges associated with lead
generation and lead optimization stages of chemistry
development. Our products address the increased demand for
chemists to make exclusive, novel and high-quality compounds
designed according to themes of drug-likeness (drugs with a
higher probability of success in humans).



| |                                           
| | ------------------------------------------
| | Polymer Reagent and Scavenger
    Products

Chemists primarily use our polymer reagents and
scavengers products to rapidly assemble collections of highly
pure small molecules with the high levels of structural
complexity currently in demand in drug discovery. The polymer
reagents and scavengers are technologies that enable chemists to
markedly improve their productivity in the crucial, multi-step
synthesis aspects of generating novel chemical entities and
complex drug target molecules. Our Solution Phase Toolboxes and
Kits are collections of bound reagents and scavengers that are
pre-configured to enable chemists to rapidly optimize
traditional work-ups and purification processes.



| |                       
| | ----------------------
| | Solid Phase Extraction

A potential drug candidate must continually be
tested from the lead optimization stage through clinical trials
to determine its pharmacological (potency), pharmacokinetic
(availability and specificity) and toxicology (safety). Our
ISOLUTE® brand of solid phase extraction (SPE)
products is used by chemists to extract and purify samples to
test for compatibility of these essential properties. We
manufacture our own sorbents that are subsequently packed into
single columns and 96-well high throughput SPE plates. In
addition, we manufacture sample processing stations that are
designed to simplify the task of processing samples using
disposable ISOLUTE extraction products.



| |                                  
| | ---------------------------------
| | Flash Chromatography Purification

A fast and cost-effective technique for the
separation and preparation of complex mixtures, flash
chromatography is quickly replacing traditional column
chromatography. With the increasing number of organic compounds
being produced, there are subsequent demands placed on
purification throughput.

8



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Economical and easy to use, our ISOLUTE®
Flash Columns provide flexible method development and scale-up
options for organic chemists. Pre-packed, high purity
polypropylene columns containing ISOLUTE® Flash sorbents,
ISOLUTE® Flash chromatography columns are time saving and
economical alternatives to traditional self-packed glass
columns. The ISOLUTE® Flash columns are disposable, thereby
saving time and effort. Moreover, they provide consistent
chromatographic reproducibility and uniform flow profiles. All
ISOLUTE® Flash columns are fully compatible with the
FlashMaster instrument systems.




| |                
| | ---------------
| | Instrumentation

Our instrumentation products comprise
approximately 45% of 2002 net sales. Our instrumentation
strategy is to focus our products on the needs of chemists in
the process development stage who are under increased pressure
to rapidly develop robust, safe, cost effective and
scale-independent processes for the production of
pharmaceuticals. Our products utilize the benefits of automated
synthesis guided by software to design, execute and collect data
essential to the production of large quantities of the drug
candidate for clinical trials.



| |          
| | ---------
| | Endeavor®

The Endeavor® product brings parallel
methodology to catalyst discovery and screening. The process
chemist can run eight individual pressurized, gaseous reactions
simultaneously, while monitoring gas consumption in each
reaction vessel. Based on technology developed by Symyx
Technologies, Endeavor® is used for polymerization,
hydrogenation and catalyst screening which are essential to the
drug development process.



| |                                                        
| | -------------------------------------------------------
| | Advantage
    SeriesTM2050 manual chemistry synthesizer

The Advantage SeriesTM 2050 manual
chemistry synthesizer is an easy to use, bench top synthesizer
that enables the individual process chemist to conduct quick,
exploratory, parallel reaction experiments at different
temperatures. This instrument is a compact system with five
reaction vessels and individual temperature control allowing
simultaneous use of a wide range of chemical reagents to more
efficiently optimize reaction processes.



| |                                                         
| | --------------------------------------------------------
| | Advantage
    SeriesTM3400 process chemistry workstation

During 2003, we launched the Advantage
SeriesTM 3400 process chemistry workstation, a new
product from the Pfizer and ICI consortium. The Advantage
SeriesTM 3400 process chemistry workstation is used
by process chemists who need a reproducible and reliable means
to scale-up production of lead compounds for clinical trials. It
is a multi-reactor system designed to automate, capture and
document the process chemistry workflow. Data is recorded in an
easy to use format that both chemistry departments and
individuals can use. The reporting functions are designed to
meet the scale-up needs of departmental review, data archiving
and FDA referencing. This product is important to our ability to
increase revenues in 2003 and beyond. Our failure to achieve our
anticipated levels of revenues for this product will harm our
ability to achieve our financial goals during 2003.



| |                                                    
| | ---------------------------------------------------
| | Advantage
    SeriesTM4100 process scale-up reactor

The Advantage SeriesTM 4100 process
scale-up reactor is a fully automated, integrated batch reactor
used for computer-controlled production of intermediate
quantities of pharmaceutical compounds. As an automated system
it simplifies scale-up work by allowing chemists to program and
control reaction conditions such as temperature, reagent
additions and rates using a single computer interface. The
Advantage SeriesTM 4100 process scale-up reactor uses
real-time feedback from analytical devices to automatically
obtain optimum reaction conditions as well as to work at greater
levels of lab safety.

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| |                                          
| | -----------------------------------------
| | FlashmasterTMflash chromatography systems

Our FlashmasterTM family of products
is used for a variety of purification applications and fully
utilizes the advantages of our FlashmasterTM column
consumables. The systems offered range from low cost single-user
purification systems, to high throughput parallel purification
systems, and a fully automated software controlled system.



| |         
| | --------
| | Services

We provide a variety of services for our
customers, which include integration services, contract research
and development services, installation of instruments,
instrument warranty services and instrument preventative
maintenance programs. Services comprise approximately 13% of our
2002 net sales. Our integration services focus on creating
customer specific modifications for the chemists who have unique
requirements for the Advantage SeriesTM 4100 process
scale-up reactor.

PRODUCT DEVELOPMENT STRATEGY

Our product development strategy is to combine
our expertise in chemistry and engineering with an understanding
of the needs of our market to rapidly design, validate and
launch products that fulfill these needs. To understand market
needs, we often form product development teams with our
customers. Through this process of forming product development
consortia and other strategic collaborations with our customers,
we have developed innovative products with the benefit of
extensive customer input, validation and testing prior to
commercial introduction.

Our product development consortia are
non-exclusive arrangements in which we bring together several
companies who share the need to solve a common problem. We meet
with consortium members on a regular basis during the product
development process to review product definition,
specifications, progress, validation and testing. We may give
consortium members prototypes for use in their research programs
and we incorporate their feedback into the final product.
Members typically pay a non-refundable participation fee, pay
development fees based on achieved milestones, and may receive
discounts on initial early commercial products. By participating
in our consortia, and becoming familiar with the performance and
operating characteristics of the product, we believe that
members can achieve a nine-month to one-year competitive
advantage in using the new technology we develop. Consortium
members often become the initial references during the product
development phase and initial customers upon our
commercialization of the product. We have used the consortium
approach to develop five instruments and several reagents. The
most recent consortium was comprised of two major companies,
Pfizer Inc. and ICI, PLC, and was established with the goal of
developing a state-of-the-art, multi-channel synthesizer for
chemical process scale-up and production. As a result of the
consortia efforts, Argonaut released the Advantage
SeriesTM 3400 process chemistry workstation.

Through our collaborations, we frequently
in-license technology that we believe has significant potential
for commercialization. Typically, our partner will have
developed and tested a concept to the prototype level. We
further develop and enhance the prototype into a commercially
viable product. Our contributions include design for
manufacturing, cost reduction, safety and code compliance and
ease of use issues. Our partner may receive royalties on sales
of the final product, or other commercial consideration, in
recognition of their technology contribution.

We used this approach with the
EndeavorTM product, which we developed in
collaboration with Symyx Technologies (Symyx). In
August 1999, we entered into a license and supply agreement,
which was extended in January 2002, with Symyx related to
technology used in the Endeavor product. The agreement was
further expanded and modified in August 2002. Under the new
agreement, we have licensed both exclusive and non-exclusive
worldwide rights under a broader collection of Symyx patents
than was available under the initial agreement. The new
agreement provides Argonaut with a fully paid up license for the
life of the issued and pending licensed patents. In conjunction
with the signing of this agreement, Argonaut made a

10



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one-time payment to Symyx, and Symyx will receive
no further royalties or payments from Argonaut in connection
with this license agreement.


In October 2001, we entered into a multi-year
research and development agreement with Pfizer Inc. to assess
and develop new technologies and instrument systems relevant to
Pfizer Global Research & Development programs. Under the
terms of the agreement, Pfizer will fund Argonauts
assessment and development efforts related to the new tools.
Argonaut will have exclusive rights to commercialize
technologies developed within the collaboration. Also, in August
2002 GlaxoSmithKline (GSK) joined Pfizer in the
formation of a multi-year research program in which Argonaut
will assess, develop and validate for future commercialization,
a novel instrument system to substantially accelerate the
development and synthesis of new chemical compounds. Under the
terms of the agreement, GSK and Pfizer will fund a significant
portion of Argonauts development efforts and Argonaut will
retain exclusive commercial rights to the technologies and
systems developed within the program.

Company sponsored research and development
activities totaled approximately $4.6 million,
$7.1 million, and $5.1 million for the years 2002,
2001 and 2000, respectively. Customer sponsored research and
development activities totaled approximately $999,000 for 2002.
Customer sponsored research and development was zero for the
years 2001 and 2000.

CUSTOMERS

Our customers consist of a broad range of
companies in the pharmaceutical, life sciences, biotechnology
and chemical industries, as well as academic institutions and
other research organizations. Through December 31, 2002, we
have sold our products to more than 1,200 customers and, we have
installed nearly 3,000 instruments worldwide. Our leading
customers include:

|                         |  |                       |  |                                 
|------------------------ |  | --------------------- |  | --------------------------------
|Abbott Laboratories      |  | E.I. Dupont           |  | Novartis Pharmaceuticals        
|Amgen, Inc.              |  | Eli Lilly and Company |  | Ortho-McNeil Pharmaceuticals    
|Arqule, Inc.             |  | GlaxoSmithKline       |  | Pfizer, Inc.                    
|Array Biopharmaceuticals |  | Merck & Company       |  | Pharmacia & Upjohn Company      
|AstraZeneca              |  | Monsanto Company      |  | Procter & Gamble Pharmaceuticals

Sales by geographic region and market for fiscal
years 2002, 2001 and 2000 are represented in Note 12 to the
Consolidated Financial Statements.

No single customer accounted for more than 10% of
our revenue during fiscal years 2002, 2001 and 2000.

SALES, MARKETING AND SERVICE

We base our sales strategy on understanding our
customers needs, recommending solutions and ensuring
successful implementation of that solution in our
customers research laboratories. Our approach is designed
to achieve customer satisfaction and build a long-term working
relationship with our customer.

Currently, our direct sales, marketing and
service organization include 60 full-time employees located in
North America, Europe and Japan. Our team of professionals is
comprised of senior account-oriented sales people, application
chemists, service engineers, telesales people and marketing
specialists who sell directly to our customers worldwide. We
have over 20 sales professionals with experience in selling high
technology products to the scientific industry. In addition to
their academic expertise, the industrial laboratory experience
of our sales professionals is essential to their ability to
understand our customers needs. We have application
chemists and service engineers with expertise in both chemistry
and engineering to support our customers worldwide. We have
professional marketing communication specialists located in the
United States and the United Kingdom dedicated to providing
local marketing programs.

We use distributors to provide local sales and
marketing in some 15 foreign countries, including China,
Australia, Korea, Eastern Europe, Finland, Sweden, Denmark,
Italy and Spain. In these countries, we seek to

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maintain close contact with our customers and
potential customers by providing application and service support
through our worldwide marketing organization. We have developed
scientific seminars to educate and train our customers. We
conduct on-site seminars in the use of our chemistry reagents
and purification products, referencing important scientific
publications and research that validate their successful usage.


Our web site provides technical information
regarding the use of our instruments and chemistry consumables
for our customers. The combination of our telesales with readily
available technical information makes it very easy for a
customer to make routine purchases of our reagents and
consumables.

To increase awareness of our products, we have
arrangements with leading academic research institutions to
provide them with our products. In return our products are
validated by reputable institutions through published results in
leading scientific journals and the researchers creation
of application notes. We also work with universities to assist
them in creating and implementing teaching laboratories that
promote the scientific advantages associated with the use of our
products.

MANUFACTURING

A series of qualified outside suppliers
manufacture important components of our instruments and reagents
to our specifications. Our suppliers then deliver the finished
product to us for final quality assurance testing. The space
available at our manufacturing facilities will accommodate the
current and near-term production levels. All products are
assembled and tested by qualified personnel at our manufacturing
sites in Foster City, California and Cardiff, Wales, United
Kingdom.

Our instrument manufacturing staff is comprised
of skilled manufacturing engineers, material procurement,
assembly and test personnel, which are closely integrated with
our product development group. We focus these resources on the
rapid development of manufacturing processes and methods,
selecting suppliers to minimize the requirements for inspecting,
stocking and testing of components during the manufacturing
process.

Our chemistry organization develops, validates,
documents and initially manufactures our reagents and functional
silica products at our sites in Foster City, California and
Cardiff, Wales, United Kingdom. Our Cardiff facility has modern
automation equipment for the packaging of our sample preparation
and flash columns into a variety of formats, including columns
and plates. During reagent development, we qualify outside
manufacturers, known as toll manufacturers, so that we can
outsource production as demand and volume increase.

INTELLECTUAL PROPERTY

As of December 31, 2002, we owned a patent
portfolio of eight issued U.S. patents and one issued
foreign patent as well as several pending U.S. patent
applications. Corresponding foreign patent applications have
been filed in a number of countries. Of these issued patents,
five U.S. patents relate to the reactor and fluidics technology
incorporated into our instruments. Several of our patent
applications relate to this technology and others relate to our
reagent technologies. We intend to continue to file patent
applications covering any new inventions incorporated into our
products and technologies as appropriate. In addition, we rely
upon copyright protection as well as trade secrets, know-how and
continuing technological innovation to develop and maintain our
competitive position. Our success will depend in part upon our
ability to obtain patent protection for our products and
technologies, to preserve our copyrights and trade secrets, and
to operate without infringing on the proprietary rights of third
parties. Our issued patents expire between 2018 and 2021.

We have an exclusive license from Symyx
Technologies relating to technology incorporated in our Endeavor
product. We have a non-exclusive license to certain other Symyx
patents based on an agreement in August 2002. The exclusive and
non-exclusive portions of the license are in perpetuity.

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BACKLOG

Manufacturing turnaround time has generally been
sufficiently short so as to permit us to manufacture to fill
orders for most of our products, which helps to limit our
inventory costs. Due to generally short time period between
order and shipment and occasional customer changes in delivery
schedules, we do not believe that our backlog, as of any
particular date, is an accurate indicator of actual net sales
for any future period. Backlog is therefore generally a function
of requested customer delivery dates and is typically no longer
than one to two months. The value of the backlog as of
December 31, 2002 was approximately $2.7 million, not
including deferred revenue from contract research and
development agreements.

COMPETITION

We anticipate that competition will come
primarily from companies providing products based on traditional
chemistry methods as well as companies that offer competing
products based on alternative technologies. In order to compete
effectively, we will need to demonstrate the advantages of our
products over well-established traditional chemistry methods and
alternative technologies and products. We will also need to
demonstrate the potential economic value of our products
relative to traditional chemistry methods and alternative
technologies and products. Some of the companies that provide
products that compete with ours include Mettler-Toledo AG,
Biotage, Isco, Inc., HEL, Nova Biochem, Polymer Laboratories and
several smaller instrument and reagent companies.

GOVERNMENT REGULATION

We are subject to various federal, state and
local laws and regulations relating to the protection of the
environment. In the course of our business, we are involved in
the handling, storage and disposal of chemicals. The laws and
regulations applicable to our operations include provisions that
regulate the discharge of materials into the environment.
Usually these environmental laws and regulations impose
strict liability, rendering a person liable without
regard to negligence or fault on the part of such person. Such
environmental laws and regulations may expose us to liability
for the conduct of, or conditions caused by, others, or for acts
that were in compliance with all applicable laws at the time the
checks were performed. We have not been required to make
material expenditures in connection with our efforts to comply
with environmental requirements. We do not believe that
compliance with such requirements will have a material adverse
effect upon our capital expenditures, results of operations or
competitive position. Because the requirements imposed by such
laws and regulations are frequently changed, we are unable to
predict the cost of compliance with such requirements in the
future, or the effect of such laws on our capital expenditures,
results of operations or competitive position.

EMPLOYEES

As of December 31, 2002, we had
approximately 215 employees worldwide. None of our
employees are covered by a collective bargaining agreement. We
believe that our relations with our employees are good.

AVAILABLE INFORMATION

Our principal executive offices are located at
1101 Chess Drive, Foster City, CA 94404, and our main
telephone number is (650) 655-4200. Investors can obtain
access to this annual report on Form 10-K, our quarterly
reports on Form 10-Q, our current reports on Form 8-K
and all amendments to these reports, free of charge, on our
website at http://www.argotech.com as soon as reasonably
practicable after such filings are electronically filed with the
SEC. The public may read and copy any material we file with the
SEC at the SECs Public Reference Room at 450 Fifth
Street, N.W., Washington D.C., 20549. The public may obtain
information on the operations of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet
site, http://www.sec.gov, that contains reports, proxy and
information statements and other information regarding issuers
that file electronically with the SEC.

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Item 2.     Properties

Facilities

We occupy approximately 32,000 combined
square feet of leased office space and research facilities in
Foster City, California. These facilities serve as the base for
our marketing and product support operations, research and
development, manufacturing and administration activities. We
have leased substantially all of our space through the second
quarter of 2004. In addition, we lease approximately
13,400 square feet of office space in Indianapolis,
Indiana, 1,880 square feet of research in Tucson, Arizona,
2,200 square feet of office space in Midland, Michigan, and
200 square meters of office space in Tokyo, Japan. These
offices are the base operations for our sales and support groups
in the respective regions. We also own approximately 50,000
combined square feet in two facilities located near Cardiff,
United Kingdom. The facilities serve as the base of operations
for marketing and product support operations, research and
development, manufacturing and administration for our European
based activities. We believe that our existing facilities are
adequate for the present and that additional space will be
available as needed.




Item 3.     Legal
Proceedings

From time to time, we may be involved in
litigation that arises through the normal course of business. As
of the date of filing of this Form 10-K, we are not a party
to any litigation that we believe could reasonably be expected
to harm our business or results of operations in any material
respects.




Item 4.     Submission
of Matters to a Vote of Security Holders

None.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Price Range
of Common Stock

|               |  |             |      |             |  |      |      |     |  |   |       |  |  |   |      | 
|-------------- |  | ----------- | ---- | ----------- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ---- | 
|               |  |             |      |            
|               |  | 2002        |      | 2001       
|               |  | Sales Price |      | Sales Price
|               |  |             |      |            
|               |  | High        |      | Low         |  | High |      | Low
|               |  |             |      |             |  |      |      |    
|First Quarter  |  | $           | 4.22 |             |  | $    | 2.22 |     |  | $ | 10.81 |  |  | $ | 5.13 | 
|Second Quarter |  |             | 3.05 |             |  |      | 1.01 |     |  |   | 7.38  |  |  |   | 4.20 | 
|Third Quarter  |  |             | 1.13 |             |  |      | 0.51 |     |  |   | 5.85  |  |  |   | 2.65 | 
|Fourth Quarter |  |             | 1.04 |             |  |      | 0.55 |     |  |   | 4.49  |  |  |   | 2.35 | 

Our common stock was quoted on the Nasdaq Stock
Markets National Market under the symbol AGNT
since our initial public offering on July 19, 2000 until
December 4, 2002. Since December 4, 2002 our common
stock has been quoted on the Nasdaq Stock Markets SmallCap
Market under the same symbol. Prior to July 19, 2000, there
was no public market for our stock. The preceding table sets
forth the high and low sales prices per share of our common
stock as reported on the Nasdaq Stock Markets National
Market or the Nasdaq SmallCap Market for the periods indicated.

Dividend
Policy

We have not paid any cash dividends to date and
do not anticipate paying any cash dividends in the foreseeable
future. We currently expect to retain future earnings, if any,
for use in the operation and expansion of our business.

14



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Holders of
Common Stock

As of February 28, 2003, there were
156 holders of record of our common stock.

Issuance of
Unregistered Common Stock

On February 20, 2002, the Company issued
572,152 shares of unregistered common stock in connection
with the acquisition of the Jones Group. The total consideration
was approximately $1.8 million, or $3.1967 per share.

On March 1, 2001, the Company issued
666,667 shares of unregistered common stock in connection
with the acquisition of ATSI. The total consideration was
approximately $4.7 million, or $7.00 per share.



| |                                                                       
| | ----------------------------------------------------------------------
| | Securities Authorized for Issuance Under
    Equity Compensation Plans

|                                                               |       |                      |           |                      |  |                         |      |      |  |  |           |           | 
|-------------------------------------------------------------- | ----- | -------------------- | --------- | -------------------- |  | ----------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                               |       |                      |           |                      |  | Number of Securities   
|                                                               |       |                      |           |                      |  | Remaining Available For
|                                                               |       | Number of Securities |           |                      |  | Future Issuance Under  
|                                                               |       | to be Issued         |           | Weighted-Average     |  | Equity Compensation    
|                                                               |       | Upon Exercise of     |           | Exercise Price of    |  | Plans                  
|                                                               |       | Outstanding Options, |           | Outstanding Options, |  | (Excluding Securities  
|Plan Category                                                  |       | Warrants and Rights  |           | Warrants and Rights  |  | Reflected in Column(a))
|                                                               |       |                      |           |                      |  |                        
|                                                               |       | (a)                  |           | (b)                  |  | (c)                    
|Equity compensation plans approved by security
    holders     |       |                      | 4,062,132 |                      |  | $                       | 2.75 |      |  |  | 1,346,761 |          
|Equity compensation plans not approved by
    security holders |       |                      |          |                      |  |                         |     |      |  |  |          |          
|                                                               |       |                      |           |                      |  |                         |      |      |  |  |           |          
|                                                               | Total |                      |           | 4,062,132            |  |                         | $    | 2.75 |  |  |           | 1,346,761 | 
|                                                               |       |                      |           |                      |  |                         |      |      |  |  |           |          




Item 6.     Selected
Financial Data

The following selected financial data has been
derived from our audited financial statements and the following
table should be read in conjunction with the consolidated
financial statements and the notes to such statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this Annual Report on Form 10-K. Historical results are not
necessarily indicative of the results to be expected in the
future.

The pro forma net loss per share and shares used
in computing pro forma net loss per share are calculated as if
all of our convertible preferred stock was converted into shares
of our common stock on the date of issuance. Each outstanding
share of preferred stock was converted to 0.88 shares of
common stock upon completion of our initial public offering on
July 19, 2000.

|                               |                                                              |                                      |        |        |  |      |        |        |  |      |        |        |  |   |        |       |  |   |        |       | 
|------------------------------ | ------------------------------------------------------------ | ------------------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ----- |  | - | ------ | ----- | 
|                               |                                                              |                                     
|                               |                                                              | Years Ended December 31,            
|                               |                                                              |                                     
|                               |                                                              | 2002                                 |        | 2001   |  | 2000 |        | 1999   |  | 1998
|                               |                                                              |                                      |        |        |  |      |        |        |  |     
|                               |                                                              |                                     
|                               |                                                              | (In thousands except per share data)
|Statements of Operations Data: |                                                              |                                      |        |        |  |      |        |        |  |      |        |        |  |   |        |       |  |   |        |      
|Net sales                      |                                                              | $                                    | 26,317 |        |  | $    | 17,063 |        |  | $    | 17,449 |        |  | $ | 10,558 |       |  | $ | 12,076 |      
|Costs and expenses:            |                                                              |                                      |        |        |  |      |        |        |  |      |        |        |  |   |        |       |  |   |        |      
|                               | Cost of sales                                                |                                      |        | 15,004 |  |      |        | 9,431  |  |      |        | 7,994  |  |   |        | 4,689 |  |   |        | 5,608 | 
|                               | Research and development                                     |                                      |        | 5,627  |  |      |        | 7,089  |  |      |        | 5,057  |  |   |        | 4,180 |  |   |        | 4,922 | 
|                               | Selling, general and administrative                          |                                      |        | 17,453 |  |      |        | 16,686 |  |      |        | 13,819 |  |   |        | 9,125 |  |   |        | 7,108 | 
|                               | Amortization of goodwill and purchased intangible
    assets |                                      |        | 735    |  |      |        | 1,157  |  |      |        |       |  |   |        |      |  |   |        |      | 
|                               | Acquired in-process research and development                 |                                      |        |       |  |      |        | 270    |  |      |        |       |  |   |        |      |  |   |        |      | 

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|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |      |        |   |        |   |        |   |        |   |        |   |        | 
|---------------------------------------------------------------------------------------------------- | --------------------- | ------------------------------------ | ------- | ----- | ------ | ---- | ------- | ----- | ------ | ---- | ------ | - | ------ | - | ------ | - | ------ | - | ------ | - | ------ | 
|                                                                                                     |                       |                                     
|                                                                                                     |                       | Years Ended December 31,            
|                                                                                                     |                       |                                     
|                                                                                                     |                       | 2002                                 |         | 2001  |        | 2000 |         | 1999  |        | 1998
|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |     
|                                                                                                     |                       |                                     
|                                                                                                     |                       | (In thousands except per share data)
|                                                                                                     | Restructuring charges |                                      |         | 1,802 |        |      |         | 384   |        |      |        |  |        |   |        |  |        |   |        |  |       
|                                                                                                     | Impairment charge     |                                      |         |      |        |      |         | 5,520 |        |      |        |  |        |   |        |  |        |   |        |  |       
|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |      |        |   |        |   |        |   |        |   |        |  
|                                                                                                     |                       | Total costs and expenses             |         |       | 40,621 |      |         |       | 40,537 |      |        |   | 26,870 |   |        |   | 17,994 |   |        |   | 17,638 | 
|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |      |        |   |        |   |        |   |        |   |        |  
|Loss from operations                                                                                 |                       |                                      | (14,304 | )     |        |      | (23,474 | )     |        |      | (9,421 | ) |        |   | (7,436 | ) |        |   | (5,562 | )
|Interest and other income (expenses), net                                                            |                       |                                      | 663     |       |        |      | 2,679   |       |        |      | 1,900  |   |        |   | (167   | ) |        |   | (94    | )
|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |      |        |   |        |   |        |   |        |   |        |  
|Net loss before provision for income taxes                                                           |                       |                                      | (13,641 | )     |        |      | (20,795 | )     |        |      | (7,521 | ) |        |   | (7,603 | ) |        |   | (5,656 | )
|Provision for income taxes                                                                           |                       |                                      | (217    | )     |        |      |        |       |        |      |       |   |        |   |       |   |        |   |       |  
|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |      |        |   |        |   |        |   |        |   |        |  
|Net loss                                                                                             |                       | $                                    | (13,858 | )     |        | $    | (20,795 | )     |        | $    | (7,521 | ) |        | $ | (7,603 | ) |        | $ | (5,656 | )
|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |      |        |   |        |   |        |   |        |   |        |  
|Net loss per common share, basic & diluted                                                           |                       | $                                    | (0.70   | )     |        | $    | (1.09   | )     |        | $    | (0.79  | ) |        | $ | (3.55  | ) |        | $ | (3.31  | )
|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |      |        |   |        |   |        |   |        |   |        |  
|Weighted-average shares used in computing net
    loss per common share, basic and diluted           |                       |                                      | 19,876  |       |        |      | 19,048  |       |        |      | 9,538  |   |        |   | 2,142  |   |        |   | 1,710  |  
|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |      |        |   |        |   |        |   |        |   |        |  
|Pro forma net loss per common share, basic and
    diluted                                           |                       |                                      |         |       |        |      |         |       |        | $    | (0.50  | ) |        | $ | (0.68  | ) |        |   |        |  
|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |      |        |   |        |   |        |   |        |   |        |  
|Weighted-average shares used in computing pro
    forma net loss per common share, basic and diluted |                       |                                      |         |       |        |      |         |       |        |      | 15,009 |   |        |   | 11,263 |   |        |   |        |  
|                                                                                                     |                       |                                      |         |       |        |      |         |       |        |      |        |   |        |   |        |   |        |   |        |  

|                                                  |  |                |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                  |  |               
|                                                  |  | December 31,  
|                                                  |  |               
|                                                  |  | 2002           |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                  |  |                |         |      |  |      |         |      |  |     
|                                                  |  |               
|                                                  |  | (In thousands)
|Balance Sheets Data:                              |  |                |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents and short-term investments |  | $              | 26,894  |      |  | $    | 57,632  |      |  | $    | 73,372  |   |  | $ | 11,073  |   |  | $ | 2,261   |  
|Working capital                                   |  |                | 31,001  |      |  |      | 58,292  |      |  |      | 76,131  |   |  |   | 9,061   |   |  |   | 3,115   |  
|Total assets                                      |  |                | 72,373  |      |  |      | 71,772  |      |  |      | 83,032  |   |  |   | 19,080  |   |  |   | 9,363   |  
|Long-term obligations, less current portion       |  |                | 12,334  |      |  |      |        |      |  |      | 180     |   |  |   | 1,859   |   |  |   | 4,147   |  
|Accumulated deficit                               |  |                | (69,092 | )    |  |      | (55,234 | )    |  |      | (34,439 | ) |  |   | (26,918 | ) |  |   | (19,315 | )
|Total stockholders equity                        |  |                | 52,513  |      |  |      | 63,764  |      |  |      | 77,720  |   |  |   | 9,048   |   |  |   | 865     |  






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

This annual report contains forward-looking
statements for purposes of the Private Securities Litigation
Reform Act of 1995, and it is the Companys intention that
such statements be protected by the safe harbor created thereby.
Examples of such forward-looking statements include statements
regarding future revenues, expenses, losses and cash flows, our
ability to be cash flow positive in the fourth quarter of 2003,
research and development activities and sales and marketing
initiatives such as our plan to concentrate our efforts in those
areas such as building our core consumables business, possible
future acquisitions, the anticipated effects of the acquisition
of Jones Group to our net sales performance and pre-tax
operating results, our plans to discontinue non-performing
consumable products and certain legacy instrument products, the
anticipated effects of our recent restructuring program and
related accruals, values of our assets and liabilities over
their remaining useful lives and our testing for impairment of
goodwill, and our expectations as to the duration of our
negative cash flows from operations and the sufficiency of
existing cash reserves for the next 12 months. Actual
results may differ materially from those projected in such
forward-looking statements due to various known and unknown
risks and uncertainties, including the risk that a decline in
the economy generally or the market for our products will
adversely affect our business, the risk that the market for our
products and services does not develop as anticipated, the risk
that we are unable to successfully integrate the product and

16



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service offerings of the company we recently
acquired and successfully capitalize on anticipated synergies
and growth opportunities, and the risk that our restructuring
programs do not proceed as planned and that we incur unexpected
expenses in connection with the implementation thereof. For a
further discussion of these and other risks and uncertainties
related to our business see the discussion set forth herein
under Additional Factors That May Affect Future
Results.




| |         
| | --------
| | Overview

Argonaut develops innovative products designed to
help pharmaceutical and other chemists engaged in the discovery
and development of new chemical entities increase their
productivity and reduce their operating costs without
compromising the scientific integrity of their research. Our
products are designed to enable chemists to increase their
productivity, reduce their operating costs through automation
and process simplification, and cost effectively explore the
increasing number of drug targets available for drug
development. We derive revenues primarily from the sale of our
chemistry consumable products, instrumentation products and
services. We commenced commercial shipment of our first
generation instrument in 1996, the Quest product line in 1997,
the Trident product line in 1998 and the Surveyor and the
Endeavor product lines in 2000. Revenue from sales of our
instrument products is recognized when delivery and installation
of the product is complete. We also derive revenues from the
sale of reagents and other instrument related consumables, as
well as revenues derived from products and integration services
and the sale of instruments and consumables products of Jones
Chromatography Limited (Jones Group), which we
acquired on February 20, 2002. Our expenses have consisted
primarily of costs incurred in research and development,
manufacturing and general and administrative costs associated
with our operations, and our sales and marketing organization.

Since our inception, we have incurred significant
losses and, as of December 31, 2002, we had an accumulated
deficit of $69.1 million. We believe we will be cash flow
positive in the fourth quarter of 2003 if we can achieve the
many elements of our 2003 business plan and overcome the many
risks detailed in Item 7.



| |                    
| | -------------------
| | Recent Developments



| |                           
| | --------------------------
| | Acquisition of Jones Group

On February 20, 2002, Argonaut completed its
acquisition of Jones Chromatography Limited, a company organized
under the laws of England and Wales (JCL), and its
wholly owned subsidiaries International Sorbent Technology
(IST) and Jones Chromatography U.S.A., Inc.
(JCI) (collectively, Jones Group).
Pursuant to a Share Purchase Agreement (the Purchase
Agreement), dated February 11, 2002, among Argonaut
and the stockholders of JCL, the Jones Group became a wholly
owned subsidiary of Argonaut. The Jones Group continues to
operate out of its Cardiff, Wales, U.K. locations.

The Jones Group is a leading manufacturer and
distributor of high quality chromatography and purification
accessories, consumables and instrumentation. Consumable items
include leading brand sorbents, solid phase extraction
(SPE) columns and 96-well plates, flash
chromatography and High Performance Liquid Chromatography
(HPLC) columns. It manufactures purification and
other chemistry development instruments for the drug discovery
market.

In the transaction, the stockholders of JCL
exchanged all of their respective shares of JCLs stock for
(i) cash in an aggregate amount of £3,825,000
($5,431,500), (ii) 572,152 shares of unregistered Argonaut
Common Stock, and (iii) notes payable in the aggregate
principal amount of £7,650,000 ($10,863,000). Including
transactions costs of approximately $0.9 million, the
aggregate purchase price was approximately $19.0 million,
valued as of the closing of the transaction. The notes payable,
which are redeemable for cash over a two year period following
the closing date, are guaranteed by Barclays Bank PLC. Under the
terms of the Share Purchase Agreement, notes payable in the
aggregate principal amount of £2,550,000
($3.6 million) will be held in escrow until
February 20, 2004, the second anniversary of the closing
date, and may be used to satisfy certain indemnification
obligations, if any, of the principal JCL shareholders. In
addition, certain employees of the Jones Group remaining as
employees after the transaction have received stock options to
purchase an aggregate 349,800 shares of Argonauts
Common Stock at an exercise price of $3.1967 per share.

17



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Immediately prior to the acquisition of the Jones
Group by the Company, the shareholders of JCL effected a series
of transactions whereby JCL acquired all of the shares in the
capital of IST and JCI which were not previously held by JCL.



| |                      
| | ---------------------
| | Restructuring charges

In the fourth quarter of 2001, the Company
announced a restructuring program to downsize our organizational
structure in order to reduce operating expenses and improve
workforce processes and efficiencies. As a result, the Company
recorded a charge of $384,000, which includes termination
benefits and related expenses of $362,000 related to a reduction
of our workforce by 22 employees and expenses of $22,000 for
abandonment of excess equipment. The restructuring program was
expected to yield cash savings of approximately
$3.4 million annually, beginning in fiscal 2002. These
savings largely relate to reduced employee-related costs and
were expected to be realized primarily in operating expenses. At
December 31, 2002, all 22 employees had been terminated and
the accrued restructuring liability was zero. For the
twelve-month period ended December 31, 2002, cash payments
related to the restructuring program were $342,000.

On August 8, 2002, the Company announced its
intention to execute a restructuring program focused on
improving productivity, reducing operational expenses in remote
offices, and implementing a workforce reduction of approximately
20% of the existing worldwide employees. As a result, the
Company recognized a charge of $1.8 million in the third
quarter ending September 30, 2002. The charge included
termination benefits and related expenses of approximately
$630,000 related to the reduction of our workforce by 44
employees, expenses of approximately $683,000 related to the
abandonment of excess equipment, expenses of approximately
$356,000 for the abandonment of excess leased facilities, and
expenses of approximately $133,000 for various related charges.
The restructuring program is estimated to result in annualized
savings of approximately $3.0 million beginning in fiscal
2003, realized primarily in reduced operating costs as a result
of reduced employee-related costs. At December 31, 2002, 20
of the 44 employees had been terminated and the accrued
restructuring liability was $877,000. During 2002, cash payments
related to the 2002 restructuring program were $242,000.
Remaining cash expenditures relating to workforce reduction and
other related charges will be paid through the first quarter of
fiscal 2003. Amounts related to the abandonment of excess leased
facilities will be paid as the lease payments are due through
the remainder of the lease terms through 2004.



| |                             
| | ----------------------------
| | Critical Accounting Policies

We consider certain accounting policies related
to revenue recognition, allowance for doubtful accounts,
impairment of investments, inventory adjustments, warranty
liabilities, restructuring charge, purchase accounting,
impairment of long-lived assets, income tax and stock
compensation to be critical policies due to the estimation
processes involved in each.



| |                 
| | ----------------
| | Use of Estimates

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires that we make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ from those estimates.



| |                    
| | -------------------
| | Revenue Recognition

For each arrangement, we determine whether
persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, collectibility is
reasonably assured and fees are fixed or determinable. If any of
these criteria are not met, revenue recognition is deferred
until all of the criteria are met.



| |                
| | ---------------
| | Product Revenue

Revenue related to product sales with no future
obligation is recognized upon shipment when the recognition
criteria have been met. For those products where we have
obligations to provide installation

18



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services, revenue is recognized upon installation
when the recognition criteria have been met. Sales that require
customer acceptance are not recognized as revenue until the
requirements have been met.




| |                 
| | ----------------
| | Services Revenue

Maintenance contract revenue, including revenue
for extended warranties, is recognized ratably over the
contractual period; training, contract research and development,
and other services revenue is recognized as the services are
rendered.



| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our
customers to make required payments. We determine the adequacy
of this allowance by regularly reviewing the composition of our
accounts receivable aging and evaluating individual customer
receivables, considering our customers financial
condition, credit history and current economic conditions. If
the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required.



| |            
| | -----------
| | Investments

Investments are classified as available-for-sale
and recorded at fair value. Unrealized investment gains and
losses are reflected in stockholders equity. Investment
income is recorded when earned, and capital gains and losses are
recognized when investments are sold. Investments are reviewed
periodically to determine if they have suffered an impairment of
value that is considered other than temporary. If investments
are determined to be impaired, a capital loss is recognized at
the date of determination.

Testing for impairment of investments also
requires significant management judgment. The identification of
potentially impaired investments, the determination of their
fair value and the assessment of whether any decline in value is
other than temporary are the key judgment elements. The
discovery of new information and the passage of time can
significantly change these judgments. Revisions of impairment
judgments are made when new information becomes known, and any
resulting impairment adjustments are made at that time. The
current economic environment and recent volatility of securities
markets increase the difficulty of determining fair value and
assessing investment impairment. The same influences tend to
increase the risk of potentially impaired assets.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost (on a
first-in, first-out cost method) or market value. We record
adjustments to the value of inventory based upon the forecasted
plans to sell our inventories. The physical condition (e.g., age
and quality) of the inventories is also considered in
establishing its valuation. These adjustments are estimates,
which could vary significantly, either favorably or unfavorably,
from actual requirements if future economic conditions, customer
inventory levels or competitive conditions differ from our
expectations.



| |           
| | ----------
| | Warranties

We provide for the estimated cost of product
warranties at the time revenue is recognized. While the Company
engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its
component suppliers, our warranty obligation is affected by
product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product
failure rates, material usage or service delivery costs differ
from our estimates, revisions to the estimated warranty
liability would be required.

19



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##### Table of Contents





| |              
| | -------------
| | Restructuring

During fiscal years 2002 and 2001, we recorded
significant reserves in connection with our restructuring
program. These reserves include estimates pertaining to employee
separation costs, related abandonment of excess equipment, the
abandonment of excess leased facilities, and other related
charges. Although we do not anticipate significant changes, the
actual costs may differ from these estimates.



| |                    
| | -------------------
| | Purchase Accounting

In June 2001, the Financing Accounting Standards
Board issued SFAS 141, Business Combinations
(SFAS 141). SFAS 141 requires that the
purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141 also
includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. We accounted
for the acquisitions of ATSI and Jones Group under the purchase
method of accounting and accordingly, the acquired assets and
liabilities assumed were recorded at their respective fair
values. The recorded values of assets and liabilities were based
on third-party estimates and valuations. The remaining values
were based on our judgments and estimates, and accordingly, the
Companys consolidated financial position or results of
operations may be affected by changes in estimates and judgments.



| |                                                             
| | ------------------------------------------------------------
| | Amortization of Goodwill and Other Purchased
    Intangibles

In June 2001, the Financing Accounting Standards
Board issued SFAS 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 142
prohibits the amortization of goodwill and intangible assets
with indefinite useful lives. SFAS 142 requires that these
assets be reviewed for impairment at least annually. Intangible
assets with finite lives will continue to be amortized over
their estimated useful lives. Additionally, SFAS 142
requires that goodwill included in the carrying value of equity
method investments no longer be amortized.

The Company adopted SFAS 142 on
January 1, 2002. The Company reclassified $763,000 of
identifiable intangible assets with indefinite lives, as defined
by SFAS 142, to goodwill at the date of adoption. The
Company tested for goodwill and indefinite lived intangible
assets impairment using a two-step process prescribed by
SFAS 142. The first step is a screen for potential
impairment, while the second step measures the amount of
impairment by reporting unit, if any. The Company performed the
first step of the required impairment test of goodwill and
indefinite lived intangible assets in the second quarter of
fiscal 2002, determining that no impairment was indicated.

The Company performed the annual test for
impairment of intangible assets with indefinite lives as
prescribed by SFAS 142 during the fourth quarter of fiscal
2002, determining that no impairment was indicated. The Company
determined the fair value of intangible assets with indefinite
lives based on a present value analysis of the discounted future
cash flows.



| |           
| | ----------
| | Income Tax

We recognize deferred tax assets and liabilities
based on the differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. We
regularly review our deferred tax assets for recoverability and
establish a valuation allowance based upon historical losses,
projected future taxable income and the expected timing of the
reversals of existing temporary differences. As a result of this
review, we have established a full valuation allowance against
our deferred tax assets.



| |                   
| | ------------------
| | Stock Compensation

Deferred stock compensation is the difference
between the exercise price of the options and the fair value of
the common stock at the date of grant. The fair value was
determined based on the business factors underlying the value of
our common stock on the date of grant viewed in light of our
initial public offering in July 2000 and the anticipated initial
public offering price per share. The deferred stock compensation
was recorded as a component of stockholders equity and is
being amortized over the vesting periods of the options,

20



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##### Table of Contents



generally four years, using the graded vesting
method. We recorded deferred stock compensation of approximately
$2.8 million in the year ended December 31, 2000 in
connection with the grant of stock options to employees. We have
recorded amortization of deferred stock compensation of
approximately $222,000, $1.6 million, and $2.9 million
in the years ended December 31, 2002, 2001 and 2000,
respectively. As of December 31, 2002, we had a total of
approximately $74,000 to be amortized over the remaining vesting
period of the options.


We also recorded stock compensation of $49,000,
$137,000 and $617,000 for the years ended December 31,
2002, 2001 and 2000, respectively, in connection with options
granted to consultants. These options are periodically
re-measured as they vest, in accordance with Emerging Issues
Task Force No. 96-18.

Comparative Results of Operations



| |                                           
| | ------------------------------------------
| | Years Ended December 31, 2002 and
    2001

Operating results for the year ended
December 31, 2002 include Jones Group since
February 21, 2002.



| |          
| | ---------
| | Net Sales

Net sales in 2002 were $26.3 million
compared to $17.1 million in 2001, a growth of 54%. For
2002, instrument sales comprised approximately 45% of net sales,
chemistry consumables sales comprised approximately 42% of net
sales, and service, integration services and contract research
and development (R&D) together comprised
approximately 13% of net sales. Instrument sales were
$11.9 million in 2002 versus $11.2 million in 2001, a
growth of approximately 7%. Chemistry consumables sales were
$11.1 million in 2002 versus $4.1 million in 2001, a
growth of 169%. The substantial growth in chemistry consumables
products is primarily attributable to the acquisition of the
Jones Group.



| |              
| | -------------
| | Cost of Sales

Cost of sales, comprised of cost of products and
cost of services was $15.0 million in 2002 versus
$9.4 million in 2001. The increase in cost of sales is
primarily due to the higher sales volume and a special charge
related to the write-off of excess and obsolete inventory of
approximately $765,000 recorded based on the Companys
decision to discontinue active selling of certain products as a
component of a broader restructuring plan. Gross margin as a
percent of sales was 43% for 2002 compared to 45% in 2001.
Excluding the charges related to the write-off of excess and
obsolete inventory recorded in the third quarter, and the
dilutive effect of contract research and development, gross
margin as a percent of sales would have been 47% in 2002
compared to 45% for 2001. Year over year improvement in gross
margin percentage is primarily attributable to the combined
effects of reduced manufacturing spending due to restructuring
and shifts in product mix resulting from the acquisition of the
Jones Group.



| |                                  
| | ---------------------------------
| | Research and Development Expenses

Research and development expenses decreased to
$5.6 million in 2002 compared to $7.1 million in 2001,
a decrease of 21%. These expenses include salaries and related
costs of research and development personnel, fees paid to
consultants and outside service providers, the costs of
facilities and related expenses, non-recurring engineering
charges and prototype costs related to the design, development
testing, pre-manufacturing and significant improvement of our
products. The decrease was primarily attributable to lower
personnel costs resulting from the effects of the restructuring
programs initiated in the third quarter of 2002 and the fourth
quarter of 2001, and reduced stock-based compensation expenses,
offset by approximately $360,000 due to the addition of the
Jones Group. Stock-based compensation expenses related to
research and development decreased by $458,000 for 2002 as
compared to 2001. For the year ended December 31, 2002,
stock-based compensation expense was $145,000 versus $603,000
for the same period in 2001.

21



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##### Table of Contents





| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses
increased to $17.5 million in 2002 from $16.7 million
in 2001. These expenses consist primarily of salaries and
related costs for executive, sales and marketing, finance and
other administrative personnel, the cost of facilities and
related spending, and the costs associated with promotional and
other marketing expenses. The increase was primarily
attributable to approximately $3.7 million of additional
expenses for the Jones Group, acquired on February 20,
2002, and therefore, not reflected in the prior year, offset by
the effect of the restructuring efforts initiated in the third
quarter of 2002 and the fourth quarter of 2001, and reduced
stock-based compensation charges. Stock-based compensation
expenses related to selling, general and administration
decreased by $961,000 for 2002, as compared to 2001. For the
year ended December 31, 2002, stock-based compensation
expense was $126,000 versus $1.1 million in 2001.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Amortization of Purchased Intangible Assets
    and Acquired In-Process Research & Development

On January 1, 2002, the Company adopted
SFAS 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 prohibits the
amortization of goodwill and intangible assets with indefinite
useful lives and requires that these assets be reviewed for
impairment at least annually, more frequently if certain
indicators are present. Intangible assets with finite lives will
continue to be amortized over their estimated useful lives. As
of December 31, 2002, the Company had $10.2 million in
goodwill and intangible assets that have an indefinite useful
life, and thus, no amortization expense was recorded for these
assets during the year ended December 31, 2002.
Amortization of goodwill arising from acquisitions accounted for
$827,000 in the year ended December 31, 2001. For the year
ended December 31, 2002, the Company recorded amortization
of purchased intangibles of $735,000 related to the
March 1, 2001 acquisition of ATSI and the February 20,
2002 acquisition of Jones Group compared to $1.2 million in
the same period of 2001. The Company recorded in-process
research and development expense of $270,000 for the year ended
December 31, 2001, relating to ATSI, and no such charges
were incurred in 2002.



| |                     
| | --------------------
| | Restructuring Charge

On August 8, 2002, the Company announced its
intention to execute a restructuring program focused on
improving productivity, reducing operational expenses in remote
offices, and implementing a workforce reduction of approximately
20% of its existing worldwide employees. As a result, the
Company recognized a charge of $1.8 million in the third
quarter ended September 30, 2002. The charge includes
termination benefits and related expenses of approximately
$630,000 related to the reduction of the workforce by
44 employees, expenses of approximately $683,000 related to
the abandonment of excess equipment, expenses of approximately
$356,000 for the abandonment of excess leased facilities, and
expenses of approximately $133,000 for various other related
charges. At December 31, 2002, 20 of the 44 employees
had been terminated and the accrued restructuring charge was
$877,000. For the year ended December 31, 2002, cash
payments related to the restructuring program were $242,000.



| |                                             
| | --------------------------------------------
| | Interest and Other Income (Expense),
    Net

Interest and other income decreased to
$1.2 million for the year ended December 31, 2002 as
compared to $2.9 million for the same period in 2001,
primarily because of lower average balances of invested cash,
cash equivalents, and short-term investments and reduced
interest rates consistent with the overall interest rate decline
of high quality short term investments. Interest and other
expenses was $528,000 for the year ended December 31, 2002
compared to $235,000 in the same period in 2001 primarily due to
the interest associated with the notes payable for the Jones
Group acquisition.



| |                           
| | --------------------------
| | Provision for Income Taxes

As of December 31, 2002, we had federal net
operating loss and research credit carryforwards of
approximately $49.0 million and $900,000, respectively,
which expire on various dates between 2011 and 2022. Utilization
of our net operating loss may be subject to a substantial annual
limitation due to the ownership

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change limitations provided by the Internal
Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating
loss before utilization. The Company recorded a provision for
foreign income taxes of approximately $217,000 to record
primarily the UK corporate tax liability of Jones Group for
the year ended December 31, 2002.




| |                                           
| | ------------------------------------------
| | Years Ended December 31, 2001 and
    2000



| |          
| | ---------
| | Net Sales

Net sales in 2001 were $17.1 million
compared to $17.4 million in 2000. The decrease was
substantially attributable to reduced unit volume sales of
instrument products as a result of the general economic slowdown
and more careful scrutiny of capital expenditures by our
customers. A substantially offsetting factor was the additional
net sales of approximately $2.9 million that was generated
from products and services in connection with our acquisition of
ATSI on March 1, 2001.



| |              
| | -------------
| | Cost of Sales

Cost of sales increased to $9.4 million in
2001 from $8.0 million in 2000. This increase was primarily
due to retrofit costs associated with the more recently
introduced Surveyor and Endeavor products and the additional
costs typically associated with early production units. In
addition, gross margin performance attributable to products and
services in connection with ATSI are historically lower overall.



| |                                  
| | ---------------------------------
| | Research and Development Expenses

Research and development (R&D)
expenses increased to $7.1 million in 2001 from
$5.1 million in 2000. Approximately $1.0 million of
this increase is attributable to additional R&D personnel,
facility expenses and other related spending in connection with
ATSI. We incurred additional spending for outside professional
services related to process improvement initiatives targeted at
redesigning our product development processes. As a partial
offset to these expenses, stock-based compensation expense was
approximately $588,000 less in 2001 compared to 2000.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses
increased to $16.7 million in 2001 from $13.8 million
in 2000. Primary factors contributing to this increase were
additional expenses attributable to the addition of ATSI related
headcount and related expenses aggregating approximately
$2.0 million, the first full year of additional expenses
operating as a public company, and facility related relocation
expenses as referred to above. As a partial offset to these
increased expenses, stock-based compensation expense was
approximately $1.2 million less in 2001 compared to 2000.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Impairment Charge, Amortization of Goodwill
    and Other Purchased Intangibles

Amortization of goodwill and other purchased
intangible assets was $1.2 million for fiscal 2001
representing the amortization of intangible assets recorded in
connection with our acquisition of ATSI on March 1, 2001.
Goodwill and other purchased intangible assets were
preliminarily amortized based on estimated useful lives of
10 years. At December 31, 2001, the purchase price
allocation was finalized, resulting in modifications to the
estimated useful lives of the individual intangible assets.
Until the adoption of FAS 142 at January 1, 2002, goodwill
was amortized over 10 years. Other purchased intangible
assets are amortized over 3 to 10 years.

In 2001, in accordance with the provisions of
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121), we reviewed long-lived
assets, including goodwill, for impairment whenever events or
changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable, such as a
significant industry downturn, significant decline in the market
value of the Company, or significant reductions in projected
future cash flows. Under SFAS 121, an impairment loss would
be recognized when estimated undiscounted future cash flows
expected

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to result from the use of the asset and its
eventual disposition is less than its carrying amount.
Impairment, if any, is assessed using discounted cash flows.


Downturns in the pharmaceutical, biotechnology
and chemical industries had negatively impacted the forecasted
revenues and expected cash flows from ATSI. The comparison of
the undiscounted expected future cash flows to the carrying
amount of the related purchased intangible assets resulted in an
impairment of the assets acquired, and a write-down of these
assets of approximately $5.5 million during our fourth
quarter of fiscal 2001, in accordance with our policy.



| |                                                         
| | --------------------------------------------------------
| | Acquired In-Process Research and Development
    Expense

During fiscal 2001, we recorded $270,000 of
acquired in-process research and development
(IPR&D) resulting from the acquisition of ATSI.
This amount was expensed on the acquisition date because the
acquired technology had not yet reached technological
feasibility and had no future alternative uses. There can be no
assurance that acquisitions of businesses, products or
technologies by us in the future will not result in substantial
charges for IPR&D that may cause fluctuations in our
quarterly or annual operating results. Developed technology and
IPR&D were identified and valued through extensive
interviews, analysis of data provided by ATSI concerning
developmental products, their stage of development, the time and
resources needed to complete them, if applicable, their expected
income generating ability, target markets and associated risks.
The income approach, which includes an analysis of the markets,
cash flows and risks associated with achieving such cash flows,
was the primary technique utilized in valuing the developed
technology and IPR&D.

Where developmental projects had reached
technological feasibility, they were classified as developed
technology, and the value assigned to developed technology was
capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses,
they were classified as IPR&D and charged to expense upon
closing of the acquisition. The nature of the efforts required
to develop the purchased IPR&D into commercially viable
products principally relate to the completion of all planning,
designing, prototyping, verification and testing activities that
are necessary to establish that the products can be produced to
meet their design specifications, including functions, features
and technical performance requirements.

In valuing the IPR&D, we considered, among
other factors, the importance of each project to the overall
development plan, projected incremental cash flows from the
projects when completed and any associated risks. The projected
incremental cash flows were discounted back to their present
value using a discount rate of 26%. The discount rate was
determined after consideration of our weighted average cost of
capital and the weighted average return on assets. Associated
risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological
feasibility, anticipated levels of market acceptance and
penetration, market growth rates and risks related to the impact
of potential changes in future target markets.



| |                     
| | --------------------
| | Restructuring Charge

In the fourth quarter of fiscal 2001, we
announced a restructuring program to downsize our organizational
structure in order to reduce operating expenses and improve
workforce processes and efficiencies. As a result, we recorded a
charge of $384,000, which included termination benefits and
related expenses of $362,000 related to a reduction of our
workforce by 23 employees and expenses of $22,000 for
abandonment of excess equipment. Remaining cash expenditures
relating to workforce reduction were paid in the first two
quarters of fiscal 2002. The restructuring program was expected
to yield cash savings of approximately $3.4 million
annually, beginning in fiscal 2002. These savings largely relate
to reduced employee-related costs and were expected to be
realized primarily in operating expenses.



| |                                             
| | --------------------------------------------
| | Interest and Other Income (Expense),
    Net

Interest and other income of $2.9 million in
2001 compared to $2.4 million in 2000. This increase
reflects the net effect of higher average balances of invested
cash, cash equivalents, and short term investments in

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2001 as a result of the completion of our initial
public offering in July 2000, substantially offset by reduced
interest rate yields consistent with the overall interest rate
decline of high quality short term financial instruments.
Interest and other expense was $235,000 in 2001 compared to
$503,000 in 2000 as a result of the continuing reduction of the
Companys debt obligations.


Liquidity and Capital Resources

As of December 31, 2002, the Company had
cash, cash equivalents, short-term investments and restricted
cash of $39.2 million compared to $57.6 million at
December 31, 2001. The decrease was primarily due to the
use of $6.5 million in connection with the purchase of the
Jones Group and related expenses, approximately $342,000 in cash
payments related to the restructuring initiated in the fourth
quarter of 2001, approximately $242,000 in cash payments related
to the restructuring activities initiated in the third quarter
of 2002, and approximately $10.4 million used in other
general operating activities. The restricted cash amount is
denominated in British Pounds Sterling and represents the cash
used to secure the notes payable of £7,650,000
($10.9 million) as purchase consideration in the
acquisition of Jones Group. The notes are payable over two years
carrying an initial interest rate of 3.9% per annum for the
twelve month period commencing on the date of note issuance,
payable quarterly.

Net cash used to support operating activities has
historically fluctuated based on the timing of payments of
accounts payable balances, receipts of customer deposits,
receipt of payments of accounts receivable balances, changes in
inventory balances resulting from varying levels of
manufacturing activities, the timing of research and development
projects, the timing and scope of our sales and marketing
initiatives and fluctuations in the Companys net loss.

The acquisition of Jones Group was completed on
February 20, 2002 for purchase consideration of
approximately 572,000 shares of unregistered Argonaut common
stock, £3,825,000 ($5.4 million) cash due at closing,
and notes payable aggregating £7,650,000
($10.9 million) payable over two years, plus
acquisition-related legal, accounting, and other transaction
expenses of approximately $875,000.

Net cash provided by investing activities totaled
$14.0 million in 2002 versus net cash used in investing
activities of $11.3 million in 2001. The change in 2002 was
primarily attributable to the use of $6.5 million in
connection with the purchase of the Jones Group, the use of
$10.9 million as collateral for the notes payable portion
of the Jones Group acquisition, offset by the proceeds generated
from the sale and maturity of short-term investments which
provide cash to fund the Companys ongoing operating
activities.

On August 8, 2002, the Company announced the
approval by its Board of Directors of a stock repurchase program
pursuant to which shares of its outstanding common stock having
an aggregate value of up to $500,000 may be repurchased through
open market transactions at prices deemed appropriate by the
Company. The duration of the stock repurchase program is
open-ended. The timing and amount of repurchase transactions
under this program will depend on market conditions, corporate
and regulatory considerations, and will be funded from available
working capital. At December 31, 2002, the Company had
repurchased 50,000 shares of outstanding common stock at an
average price of $0.93 per share.

The Company expects to have negative cash flows
from operations through at least the first half of 2003. We may
also use cash resources to fund additional collaborative or
strategic relationships, acquisitions or investments in other
businesses, technologies or product lines. Our future capital
requirements depend on a number of factors, including market
acceptance of our products, the resources we devote to
developing and supporting our products, continued progress of
our research and development of potential products, the need to
acquire licenses to new technology and the availability of other
financing on acceptable terms. We believe that our current cash
balances will be sufficient to fund our operations through at
least the next 12 months. To the extent that our capital
resources are insufficient to meet future capital requirements,
we will need to raise additional capital or incur indebtedness
to fund our operations. There can be no assurance that
additional debt or equity financing will be available on
acceptable terms, if at all. If adequate funds are not
available, we may be required to delay, reduce the scope of, or
eliminate, our operations or obtain funds through arrangements
with collaborative or strategic partners or others that may
require us to relinquish rights to certain technologies or
products that we might otherwise seek to retain.

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The following summarizes the Companys
contractual cash obligations at December 31, 2002, and the
effect such obligations are expected to have on our liquidity
and cash flows in future periods (in thousands):

|                                   |  |                         |        |           |  |        |       |        |  |   |        |  |  |   |   | 
|---------------------------------- |  | ----------------------- | ------ | --------- |  | ------ | ----- | ------ |  | - | ------ |  |  | - | - | 
|                                   |  |                        
|                                   |  | Payments Due By Period:
|                                   |  |                        
|                                   |  |                         |        | Less Than |  | 1 to 3 |       | 4 to 5
|Contractual Obligations            |  | Total                   |        | 1 Year    |  | Years  |       | Years 
|                                   |  |                         |        |           |  |        |       |       
|Notes payable (Jones Group)        |  | $                       | 12,327 |           |  | $      |      |        |  | $ | 12,327 |  |  | $ |  | 
|Capital lease obligations          |  |                         | 95     |           |  |        | 88    |        |  |   | 7      |  |  |   |  | 
|Operating lease obligations        |  |                         | 1,592  |           |  |        | 990   |        |  |   | 602    |  |  |   |  | 
|                                   |  |                         |        |           |  |        |       |        |  |   |        |  |  |   |   | 
|Total contractual cash obligations |  | $                       | 14,014 |           |  | $      | 1,078 |        |  | $ | 12,936 |  |  | $ |  | 
|                                   |  |                         |        |           |  |        |       |        |  |   |        |  |  |   |   | 

Factors That May Affect Our Future
Results



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have a history of operating losses and
    we may never achieve or sustain profitability and may be
    required to raise additional funds if losses
    continue.

We have incurred operating losses and negative
cash flows from operations since our inception. As of
December 31, 2002, we had an accumulated deficit of
$69.1 million and we recorded net losses of
$13.9 million for the twelve-month period ended
December 31, 2002. Although we expect to become cash flow
positive in the fourth quarter of 2003, we expect to continue to
incur operating and net losses during 2003 and we may never
generate positive cash flows.

To the extent our capital resources are
insufficient to meet our future capital requirements, we will
have to raise additional funds to continue the development and
commercialization of our products. Funds may not be available on
favorable terms, if at all. To the extent that we raise
additional capital through the sale of equity, the issuance of
those securities will result in dilution to our stockholders.

If
our products do not become widely used in the pharmaceutical,
biotechnology, life sciences and chemical industries, it is
unlikely that we will ever become profitable.

Pharmaceutical, biotechnology, life sciences and
chemical organizations have historically performed chemistry
development using traditional laboratory methods. To date, our
products have not been widely adopted by these industries. The
commercial success of our products will depend upon the adoption
of these products as a method to develop chemical compounds for
these industries. In order to be successful, our products must
meet the performance and pricing requirements for chemistry
development within the pharmaceutical, biotechnology, life
sciences and chemical industries. Market acceptance will depend
on many factors, including our ability to:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Convince prospective customers that our products
    are a cost-effective alternative to traditional methods and
    other technologies that may be introduced for chemistry
    development.        
|
| |  | Convince prospective customers that our products
    provide the same or enhanced quality and accuracy as compared
    with traditional methods and other new technologies that may be
    developed.
|
| |  | Manufacture products in sufficient quantities
    with acceptable quality and at an acceptable cost.                                                                                                 
|
| |  | Install and service sufficient numbers of our
    instruments, particularly new instruments such as the Advantage
    SeriesTM 3400 process chemistry workstation.                                   

If we cannot achieve these objectives, our
products will not gain market acceptance.



| |                                                                
| | ---------------------------------------------------------------
| | We face risks associated with past and
    future acquisitions.

Our success depends in part on our ability to
continually enhance and broaden our product offerings in
response to changing technologies, customer demands and
competitive pressures. To meet these challenges, we have
acquired complementary businesses and may choose to acquire
others in the future. We completed our acquisition of ATSI in
March 2001 and Jones Group in February 2002. During 2002, we
made significant

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progress integrating the Jones Group business;
however, we continue to have remaining integration activities
and projects. Our failure to completely and successfully
integrate this business may materially affect our business going
forward.


We do not know if we will be able to complete any
future acquisitions, or whether we will be able to successfully
integrate any acquired business, operate it profitably or retain
its key employees. Integrating any business, product or
technology we acquire could be expensive and time consuming, and
may disrupt our ongoing business and distract our management. If
we are unable to effectively integrate any acquired entities,
products or technologies, our business may suffer. In addition,
any amortization of goodwill or other assets or charges
resulting from the costs of acquisitions could negatively impact
our operating results. Our available cash and securities may be
used to buy or invest in companies or products, possibly
resulting in significant acquisition-related charges to earnings
and dilution to our stockholders. Due to volatile market
conditions, the value of long live assets maybe negatively
impacted, which may result in future, additional impairment
charges. Moreover, if we buy a company, we may have to incur or
assume that companys liabilities, including liabilities
that are unknown at the time of acquisition.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Our product development efforts may not
    produce commercially viable products.

We continue to devote significant personnel and
financial resources to research and development activities to
develop new products. We may not be successful in developing new
products, and we may never realize any benefits from such
research and development activities, including both our current
research collaboration with Pfizer and GSK and our product
development consortium with Pfizer and ICI, which may not
produce commercially viable products. Our ability to increase
our revenues and achieve and sustain profitability is dependent
upon our ability to successfully develop new and commercially
viable products. During 2003, we will be launching a new product
from the Pfizer and ICI consortium, the Advantage Series
3400 workstation, and this product is important to our ability
to increase revenues in 2003 and beyond. Our failure to achieve
our anticipated levels of revenues for this product will harm
our ability to achieve our financial goals during 2003.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Our products have lengthy sales cycles,
    which could cause our operating results to fluctuate
    significantly from quarter to quarter.

Our ability to obtain customers for our products
depends in significant part upon the perception that our
products can help accelerate efforts in chemical development.
The sale of many of our products typically involves a
significant technical evaluation and commitment of capital by
customers. Accordingly, the sales cycles of many of our products
are lengthy and subject to a number of risks that are beyond our
control, including customers budgetary constraints and
internal acceptance reviews. Our revenues could fluctuate
significantly from quarter to quarter, due to this lengthy and
unpredictable sales cycle. A large portion of our expenses,
including expenses for facilities, equipment and personnel, are
relatively fixed. Accordingly, if our revenues decline or do not
grow as we anticipate, we might not be able to correspondingly
reduce our operating expenses. Our failure to achieve our
anticipated levels of revenues could significantly harm our
operating results for a particular fiscal period. Due to the
possibility of fluctuations in our operating results, we believe
that quarter-to-quarter comparisons of our operating results are
not always a good indication of our future performance.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The capital spending policies of
    pharmaceutical, biotechnology, life sciences and other chemical
    research organizations have a significant effect on the demand
    for our instruments.

We market our products to and receive our
revenues principally from pharmaceutical, biotechnology, life
sciences and other chemical research organizations, and the
capital spending policies of these entities can have a
significant effect on the demand for our instruments. These
policies are based on a wide variety of factors, including the
resources available for purchasing research equipment, the
spending priorities among various types of research equipment
and the policies regarding capital expenditures. In particular,
the volatility of the public stock market for biotechnology and
related companies has at certain times significantly impacted
their ability to raise capital, which has directly affected
their capital spending budgets. In addition, continued

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consolidation within these industries will likely
delay and may potentially reduce capital spending by
pharmaceutical companies involved in such consolidations. Any
decrease or delay in capital spending by life sciences companies
could cause our revenues to decline and harm our profitability.




| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | In order to be successful, we must recruit,
    retain and motivate key employees, and failure to do so could
    seriously harm us.

In order to be successful, we must recruit,
retain and motivate executives and other key employees,
including those in managerial, technical, marketing and sales
positions. In particular, our product generation efforts depend
on hiring and retaining qualified technical personnel.
Attracting and retaining qualified sales representatives is also
critical to our future. Experienced management and technical,
marketing and support personnel in the chemistry instrumentation
and consumables industry are in high demand and competition for
their talents is intense, although the slowing economic
situation during 2002 has moderated somewhat this demand and
competition for talent. The loss of key employees could have a
significant impact on our operations. We also must continue to
motivate employees and keep them focused on Argonauts
strategies and goals, which may be particularly difficult due to
morale challenges posed by workforce reductions and general
uncertainty. Changes in management may be disruptive to our
business and may result in the departure of existing employees,
customers and/or research collaborators. It may take significant
time to locate, retain and integrate qualified management
personnel.



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Our direct worldwide sales force and
    network of distributors may not be sufficient to successfully
    address the market for our products.

We sell a major portion of our products through
our own sales force. We may not be able to build an efficient
and effective sales and marketing force and continue to expand
our network of distributors. Our failure to build an efficient
and effective sales and marketing force could negatively impact
sales of our products, thus reducing our revenues and
profitability.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we outsource our instrument
    component, chemical intermediates and product manufacturing, our
    ability to produce and supply our products could be
    impaired.

We outsource most of the production of components
of our instruments to vendors. We also outsource significant
quantities of our high volume chemical intermediates for our
consumables products. Our reliance on our outside vendors
exposes us to risks including:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | the possibility that one or more of our vendors
    could terminate their services at any time without notice;                     
|
| |  | reduced control over pricing, quality and timely
    delivery, due to the difficulties in switching to alternative
    vendors; and
|
| |  | the potential delays and expenses of seeking
    alternative sources of manufacturing services.                                    

Consequently, in the event that components from
our suppliers or work performed by our vendors are delayed or
interrupted for any reason, our ability to produce and deliver
our products in sufficient quantities and at acceptable costs
would decline. Additionally, certain components are provided by
a single source. The effect of a disruption of delivery of those
single source components could impact our ability to deliver
product to our customers.



| |                                                                              
| | -----------------------------------------------------------------------------
| | We are exposed to fluctuations in the
    exchange rates of foreign currency.

As a global concern, we face exposure to adverse
movements in foreign currency exchange rates. Approximately 46%
of our net sales are exposed to foreign currency risk.
Approximately 28% of our operating expenses are exposed to
foreign currency risk. These exposures may change over time as
business practices evolve and could have a material adverse
impact on our financial results. The use of the Euro as a common
currency for members of the European Union could impact our
foreign exchange exposure. We will monitor our exposure and may
hedge against this and any other emerging market currencies as
necessary.

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| |                                                                
| | ---------------------------------------------------------------
| | We are exposed to the credit risk of some
    of our customers.

Due to the current slowdown in the economy, the
credit risks relating to our customers have increased. Although
we have programs in place to monitor and mitigate the associated
risk, there can be no assurance that such programs will be
effective in reducing our credit risks. We have experienced
losses due to customers failing to meet their obligations.
Although these losses have not been significant, future losses,
if incurred, could harm our business and have a material adverse
effect on our operating results and financial conditions.



| |                                                                    
| | -------------------------------------------------------------------
| | Our business is subject to risks from
    international operations.

We conduct business globally. Accordingly, our
future results could be materially adversely affected by a
variety of uncontrollable and changing factors including, among
others, foreign currency exchange rates; regulatory, political,
or economic conditions in a specific country or region; trade
protection measures and other regulatory requirements; and
natural disasters. Any or all of these factors could have a
material adverse impact on our future international business.

Our business is subject to the effects of general
economic conditions in the United States, the United Kingdom and
globally, and, in particular, market conditions in the
pharmaceutical, biotechnology, life sciences and chemical
industries. In recent quarters, our operating results have been
adversely affected as a result of unfavorable economic
conditions and reduced capital spending in the United States,
Europe, and Asia. If the economic conditions in the United
States and globally do not improve, or if we experience a
worsening in the global economic slowdown, we may continue to
experience material adverse impacts on our business, operating
results, and financial condition.



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The life sciences industry is highly
    competitive and subject to rapid technological change, and we
    may not have the resources necessary to successfully
    compete.

We compete with companies worldwide that are
engaged in the development and production of similar products.
We face competition primarily from the following three sectors:



| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | companies marketing conventional products based
    on traditional chemistry methodologies, such as Biotage (a
    subsidiary of Dyax Corp.) and Isco, Inc.                              
|
| |  | pharmaceutical companies developing their own
    instruments; and                                                                                                                       
|
| |  | companies marketing products based upon parallel
    synthesis and other innovative technologies, such as
    Mettler-Toledo AG and several smaller instrument and
    reagent companies.

Many of our competitors have access to greater
financial, technical, research, marketing, sales, distribution,
service and other resources than we do. We face, and will
continue to face, intense competition from organizations serving
the life sciences industry that are developing or marketing
competing products and technologies. These organizations may
develop products or technologies that are superior to our
products or technologies in terms of performance, cost or both.
These organizations may offer price discounts or other
concessions as a competitive tactic that we may not be in a
position to match.

We will need to develop new applications for our
products to remain competitive. Our present or future products
could be rendered obsolete or uneconomical by technological
advances of one or more of our current or future competitors. In
addition, the introduction or announcement of new products by us
or by others could result in a delay of or decrease in sales of
existing products, as customers evaluate these new products. Our
future success will depend on our ability to compete effectively
against current technology as well as to respond effectively to
technological advances.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we infringe on or misappropriate the
    proprietary rights of others or we are unable to protect our own
    intellectual property rights our revenues could be
    harmed.

We may be sued for infringing on the intellectual
property rights of others. Intellectual property litigation is
costly, and, even if we prevail, the cost of such litigation
could affect our profitability. In addition, litigation is time
consuming and could divert management attention and resources
away from our business. If we do not

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prevail in any litigation, in addition to any
damages we might have to pay, we could be required to stop the
infringing activity or obtain a license. We may not be able to
obtain required licenses on acceptable terms, or at all. In
addition, some licenses may be nonexclusive, and therefore, our
competitors may have access to the technology licensed to us. If
we fail to obtain a required license or are unable to design
around a patent, we may be unable to sell some of our products,
which could harm our ability to compete and result in a decline
in our revenues.


Our success may depend on our ability to obtain
and enforce patents on our technology and to protect our trade
secrets. Any patents we own may not afford meaningful protection
for our technology and products. Others may challenge our
patents and, as a result, our patents could be narrowed,
invalidated or rendered unenforceable. In addition, our current
and future patent applications may not result in the issuance of
patents to us in the United States or foreign countries.
Moreover, competitors may develop products similar to ours that
are not covered by our patents.

We try to protect our non-patented trade secrets
by requiring our employees, consultants and advisors to execute
confidentiality agreements. However, we cannot guarantee that
these agreements will provide us with adequate protection
against improper use or disclosure of our trade secrets.
Further, others may independently develop substantially
equivalent proprietary information and techniques. If we are
unable to protect our proprietary information and techniques,
our ability to exclude certain competitors from the market will
be limited.



| |                                                                            
| | ---------------------------------------------------------------------------
| | There may not be an active, liquid trading
    market for our common stock.

During the fourth quarter of 2002 we transferred
from the NASDAQ National Market to the NASDAQ SmallCap Market.
There is no guarantee that an active trading market for our
Common Stock will be maintained on the NASDAQ SmallCap Market.
You may not be able to sell your shares quickly or at the market
price if trading in our stock is not active. If we fail to
comply with the continued listing requirements of the NASDAQ
SmallCap Market, we may be de-listed from trading on such
market, and thereafter trading in our common stock, if any,
would be conducted through the over-the-counter market or on the
Electronic Bulletin Board of the National Association of
Securities Dealers, Inc.



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Our stock price has been highly volatile,
    and your investment could suffer a further decline in
    value.

The trading price of our common stock has been
highly volatile and ranged in 2002 from a per-share high of
$4.22 to a low of $0.51 and could continue to be subject to wide
fluctuations in price in response to various factors, many of
which are beyond our control, including;



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in quarterly
    operating results;                                                                                    
|
| |  | failure to achieve, or changes in, financial
    estimates by securities analysts;                                                                      
|
| |  | announcements of new products or services or
    technological innovations by us or our competitors;                                                    
|
| |  | conditions or trends in the pharmaceutical,
    biotechnology, life sciences and chemical industries;                                                   
|
| |  | announcements by us of significant acquisitions,
    strategic partnerships, joint ventures or capital commitments;                                     
|
| |  | additions or departures of key personnel,
    including any directors;                                                                                  
|
| |  | developments in the application or interpretation
    of new or existing accounting pronouncements and reporting
    obligations                        
|
| |  | purchases or sales of our common stock, including
    any repurchases of our common stock under the existing or future
    stock repurchase program; and
|
| |  | developments regarding our patents or other
    intellectual property or that of our competitors.                                                       

In addition, the stock market in general, and the
NASDAQ Stock Markets National Market and SmallCap Market
and the market for technology companies in particular, have
experienced significant price

30



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and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
those companies. Further, there has been particular volatility
in the market prices of securities of life science companies.
These broad market and industry factors may negatively impact
the market price of our common stock, regardless of our
operating performance. In the past, following periods of
volatility in the market price of a companys securities,
securities class action litigation has often been instituted. A
securities class action suit against us could result in
substantial costs, potential liabilities and the diversion of
managements attention and resources.




| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our principal stockholders, directors and
    executive officers own approximately 48% of our common stock,
    which may prevent new investors from influencing corporate
    decisions.

Our principal stockholders, those who currently
own 5% or greater of our common stock, together with our
directors and executive officers beneficially own approximately
48% of our outstanding common stock. They will be able to
exercise significant influence over all matters requiring
stockholder approval, including the election of directors and
the approval of significant corporate transactions. This
concentration of ownership may also delay or prevent a change in
control of us even if beneficial to our other stockholders.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Sales of large numbers of shares of our
    common stock could cause our stock price to
    decline.

The market price of our common stock could
decline as a result of sales of substantial amounts of our
common stock in the public market, or the perception that these
sales could occur. In addition, these factors could make it more
difficult for us to raise funds through future offerings of
common stock. All of the shares sold in our initial public
offering are now freely transferable without restriction or
further registration under the Securities Act, except for any
shares purchased by our affiliates, as defined in Rule 144
of the Securities Act. The remaining shares of common stock
outstanding are restricted securities as defined in
Rule 144. These shares may be sold in the future without
registration under the Securities Act, to the extent permitted
by Rule 144 or other exemptions under the Securities Act.

On March 1, 2001, we issued
666,667 shares of unregistered common stock in connection
with the acquisition of ATSI.

On February 5, 2002, we registered
2,628,618 shares of common stock that are reserved for
issuance upon exercise of options granted under our stock option
and employee stock purchase plans. These shares can be sold in
the public market upon issuance, subject to restrictions under
the securities laws applicable to resales by affiliates.

On February 20, 2002, we issued
572,152 shares of unregistered common stock in connection
with the acquisition of Jones Group.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Anti-takeover provisions in our charter and
    bylaws and under Delaware law could make a third-party
    acquisition of us difficult.

Pursuant to our charter, our board of directors
has the authority to issue up to 10,000,000 shares of
preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any further vote of action by our stockholders.
The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire a majority of our
outstanding voting stock. Our certificate of incorporation and
bylaws contain other provisions that could make it more
difficult for a third party to acquire us, even if doing so
might be deemed beneficial by our stockholders. These provisions
could limit the price that investors might be willing to pay in
the future for shares of our common stock. We are also subject
to certain provisions of Delaware law that could delay, deter or
prevent a change in control of us.

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| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Recently Enacted and Proposed Changes in
    Securities Laws and Regulations are Likely to Increase Our
    Costs

The Sarbanes-Oxley Act of 2002 that became law in
July 2002 requires changes in some of our corporate governance
and securities disclosure or compliance practices. That Act also
requires the SEC to promulgate new rules on a variety of
subjects, in addition to rule proposals already made, and Nasdaq
has proposed revisions to its requirements for companies that
are Nasdaq-listed. We expect these developments to increase our
legal compliance costs, and to make some activities more
time-consuming. We are presently evaluating and monitoring
regulatory developments and cannot estimate the timing or
magnitude of additional costs we may incur as a result.

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 146 Accounting for Costs
Associated with Exit or Disposal Activities
(SFAS 146), effective for exit or disposal
activities that are initiated after December 31, 2002, with
early application encouraged. Under SFAS 146, a liability
for the cost associated with an exit or disposal activity is
recognized when the liability is incurred. Under prior guidance,
a liability for such costs could be recognized at the date of
commitment to an exit plan. The effect of adoption of
SFAS 146 is dependent on the Companys related
activities subsequent to the date of adoption.

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
elaborates on the existing disclosure requirements for most
guarantees, including residual value guarantees issued in
conjunction with operating lease agreements. It also clarifies
that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value of the
obligation it assumes under that guarantee and must disclose
that information in its interim and annual financial statements.
The initial recognition and initial measurement provisions apply
on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are
effective for financial statements of interim or annual periods
ending after December 15, 2002. The Companys adoption
of FIN 45 did not have a material impact on its
consolidated results of operations and financial position.

In December 2002, the FASB issued Statement
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure
(FAS 148). FAS 148 amends FAS 123
Accounting for Stock-Based Compensation to provide
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, FAS 148 amends the disclosure
requirements of FAS 123 to require more prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. The additional disclosure requirements of FAS 148
are effective for fiscal years ending after December 15,
2002. The Company has elected to continue to follow the
intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25 (or APB 25),
Accounting for Stock Issued to Employees, to account
for employee stock options.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
(FIN 46). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after
January 31, 2003. The Company does not believe it has any
investments in variable interest entities and does not
anticipate any impact with the adoption of this interpretation.

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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    about Market Risk

Interest Rate Risk

Our exposure to interest rate risk is related
principally to our investment portfolio. Fixed rate investments
may have their fair market value adversely impacted from changes
in interest rates and floating rate investments may produce less
income than expected if interest rates fall. Due in part to
these factors, our future investment income may fall short of
expectations. Further, we may suffer losses in investment
principal if we are forced to sell securities that have declined
in market value due to changes in interest rates. We invest our
excess cash in debt instruments of the U.S. government and
its agencies, and in debt instruments of high quality corporate
issuers. The principal notional amount with an expected maturity
in the following year, weighted average interest rate, and
average contractual maturity were as follows ($ in millions):

|                                                                          |  |              |      |              |  |   |      |  
|------------------------------------------------------------------------- |  | ------------ | ---- | ------------ |  | - | ---- | -
|                                                                          |  | December 31, |      | December 31,
|                                                                          |  | 2002         |      | 2001        
|                                                                          |  |              |      |             
|Principal notional amount with an expected
    maturity in following year |  | $            | 23.8 |              |  | $ | 54.2 |  
|Weighted average interest rate                                            |  |              | 1.4  | %            |  |   | 2.9  | %
|Average contractual maturity of investments (days)                        |  |              | 41   |              |  |   | 130  |  

The Company also has limited interest rate
exposure related to the notes payable issued in consideration
for the acquisition of the Jones Group. The notes payable are
denominated in British Pound Sterling in the amount of
£7,650,000 ($10.9 million) and interest is payable to
the note holders at an initial rate of 3.9% per annum for the
first twelve month period (ending February 20, 2003), and
subsequently at the rate equal to the published base rate of
Barclays Bank PLC on the date immediately preceding each
quarterly interest period, less any fees and costs. The Company
has limited interest rate risk on the notes payable due to the
deposit of £7,650,000 ($10.9 million) in cash with
Barclays Bank PLC as collateral for the principal and interest
on the notes payable. The cash amounts held as collateral are
represented as restricted cash in the Companys
consolidated balance sheet at December 31, 2002 and is
invested in money market instruments to yield rates approximate
to the interest rates due on the notes payable.

Foreign Currency Risk

As we have operations and sales outside of the
United States, our financial results can be affected by changes
in foreign currency exchange rates or weak economic conditions
in the foreign markets in which we operate. Our foreign
operations and sales increased significantly in 2002 due
primarily to the acquisition of the Jones Group. With the Jones
Group acquisition, approximately 46% of our net sales are
exposed to foreign currency risk, predominantly in the British
Pound, the Euro, and the Japanese Yen. Approximately 28% of our
expenses are exposed to foreign currency risk.

33



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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                    |  |      |    | 
|--------------------------------------------------- |  | ---- | -- | 
|                                                    |  | Page
|                                                    |  |     
|Report of Independent Auditors                      |  |      | 35 | 
|Consolidated Balance Sheets                         |  |      | 36 | 
|Consolidated Statements of Operations               |  |      | 37 | 
|Consolidated Statements of Shareholders
    Equity |  |      | 38 | 
|Consolidated Statements of Cash Flows               |  |      | 39 | 
|Notes to Consolidated Financial Statements          |  |      | 40 | 

34



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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders 
 Argonaut Technologies, Inc.

We have audited the accompanying consolidated
balance sheets of Argonaut Technologies, Inc. as of
December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2002. Our audits also include the financial
statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Argonaut Technologies, Inc.
at December 31, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 1 to the consolidated
financial statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Palo Alto, California

February 5, 2003


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ARGONAUT TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |         |        | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------- | ------ | - | ------ | ------- | ------ | 
|                                         |                                                                                                                                                                                                               |                           
|                                         |                                                                                                                                                                                                               | December 31,              
|                                         |                                                                                                                                                                                                               |                           
|                                         |                                                                                                                                                                                                               | 2002                       |        | 2001   
|                                         |                                                                                                                                                                                                               |                            |        |        
|                                         |                                                                                                                                                                                                               |                           
|                                         |                                                                                                                                                                                                               | (In thousands,            
|                                         |                                                                                                                                                                                                               | except share data)        
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         | Cash and cash equivalents                                                                                                                                                                                     |                            | $      | 20,895  |        |   | $      | 17,996  |       
|                                         | Short-term investments                                                                                                                                                                                        |                            |        | 5,999   |        |   |        | 39,636  |       
|                                         | Accounts receivable, less allowance for doubtful
    accounts of $110 in 2002 and $154 in 2001                                                                                                                |                            |        | 4,389   |        |   |        | 4,187   |       
|                                         | Inventories                                                                                                                                                                                                   |                            |        | 6,280   |        |   |        | 3,697   |       
|                                         | Notes receivable                                                                                                                                                                                              |                            |        | 237     |        |   |        |        |       
|                                         | Prepaid expenses and other current assets                                                                                                                                                                     |                            |        | 727     |        |   |        | 784     |       
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         |                                                                                                                                                                                                               | Total current assets       |        |         | 38,527 |   |        |         | 66,300 | 
|Restricted cash                          |                                                                                                                                                                                                               |                            | 12,327 |         |        |   |       |        
|Property and equipment, net              |                                                                                                                                                                                                               |                            | 4,921  |         |        |   | 3,233  |        
|Goodwill                                 |                                                                                                                                                                                                               |                            | 10,173 |         |        |   | 2,213  |        
|Other intangible assets, net             |                                                                                                                                                                                                               |                            | 6,425  |         |        |   |       |        
|Other assets                             |                                                                                                                                                                                                               |                            |       |         |        |   | 26     |        
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         |                                                                                                                                                                                                               | $                          | 72,373 |         |        | $ | 71,772 |        
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         | Accounts payable                                                                                                                                                                                              |                            | $      | 1,873   |        |   | $      | 1,681   |       
|                                         | Accrued compensation                                                                                                                                                                                          |                            |        | 1,087   |        |   |        | 1,421   |       
|                                         | Other accrued liabilities                                                                                                                                                                                     |                            |        | 2,506   |        |   |        | 1,679   |       
|                                         | Deferred revenue                                                                                                                                                                                              |                            |        | 1,972   |        |   |        | 3,040   |       
|                                         | Current portion of notes payable and capital
    lease obligations                                                                                                                                            |                            |        | 88      |        |   |        | 187     |       
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         |                                                                                                                                                                                                               | Total current liabilities  |        |         | 7,526  |   |        |         | 8,008  | 
|Long term debt                           |                                                                                                                                                                                                               |                            | 12,334 |         |        |   |       |        
|Commitments                              |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|Stockholders equity:                    |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         | Convertible preferred stock, $0.0001 par value;
    10,000,000 shares authorized at December 31, 2002 and 2001,
    issuable in series; no shares issued and outstanding at
    December 31, 2002 and 2001    |                            |        |        |        |   |        |        |       
|                                         | Common stock, $0.0001 par value; 120,000,000
    shares authorized at December 31, 2002 and 2001; 20,015,708
    and 19,281,691 shares issued and outstanding at
    December 31, 2002 and 2001, respectively |                            |        | 2       |        |   |        | 2       |       
|                                         | Additional paid-in capital                                                                                                                                                                                    |                            |        | 121,388 |        |   |        | 120,036 |       
|                                         | Deferred stock compensation                                                                                                                                                                                   |                            |        | (74     | )      |   |        | (1,008  | )     
|                                         | Accumulated deficit                                                                                                                                                                                           |                            |        | (69,092 | )      |   |        | (55,234 | )     
|                                         | Accumulated other comprehensive income (loss)                                                                                                                                                                 |                            |        | 289     |        |   |        | (32     | )     
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         |                                                                                                                                                                                                               | Total stockholders equity |        |         | 52,513 |   |        |         | 63,764 | 
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         |                                                                                                                                                                                                               | $                          | 72,373 |         |        | $ | 71,772 |        
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        

See accompanying notes.

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ARGONAUT TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |        |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                                                                                                            |                                                                    |                                      
|                                                                                                                                                            |                                                                    | Years Ended December 31,             
|                                                                                                                                                            |                                                                    |                                      
|                                                                                                                                                            |                                                                    | 2002                                  |         | 2001   |        | 2000
|                                                                                                                                                            |                                                                    |                                       |         |        |        |     
|                                                                                                                                                            |                                                                    |                                      
|                                                                                                                                                            |                                                                    | (In thousands, except per share data)
|Net sales:                                                                                                                                                  |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            | Products                                                           |                                       | $       | 22,994 |        |      | $       | 15,281 |        |   | $      | 16,816 |       
|                                                                                                                                                            | Services                                                           |                                       |         | 3,323  |        |      |         | 1,782  |        |   |        | 633    |       
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            |                                                                    | Total net sales                       |         |        | 26,317 |      |         |        | 17,063 |   |        |        | 17,449 | 
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|Costs and expenses:                                                                                                                                         |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            | Costs of products                                                  |                                       |         | 13,202 |        |      |         | 9,108  |        |   |        | 7,941  |       
|                                                                                                                                                            | Costs of services                                                  |                                       |         | 1,802  |        |      |         | 323    |        |   |        | 53     |       
|                                                                                                                                                            | Research and development (Note 1)                                  |                                       |         | 5,627  |        |      |         | 7,089  |        |   |        | 5,057  |       
|                                                                                                                                                            | Selling, general and administrative (Note 1)                       |                                       |         | 17,453 |        |      |         | 16,686 |        |   |        | 13,819 |       
|                                                                                                                                                            | Amortization of goodwill and other purchased
    intangible assets |                                       |         | 735    |        |      |         | 1,157  |        |   |        |       |       
|                                                                                                                                                            | Acquired in-process research and development                       |                                       |         |       |        |      |         | 270    |        |   |        |       |       
|                                                                                                                                                            | Restructuring charges                                              |                                       |         | 1,802  |        |      |         | 384    |        |   |        |       |       
|                                                                                                                                                            | Impairment charge                                                  |                                       |         |       |        |      |         | 5,520  |        |   |        |       |       
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            |                                                                    | Total costs and expenses              |         |        | 40,621 |      |         |        | 40,537 |   |        |        | 26,870 | 
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|Loss from operations                                                                                                                                        |                                                                    |                                       | (14,304 | )      |        |      | (23,474 | )      |        |   | (9,421 | )     
|Other income (expenses):                                                                                                                                    |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            | Interest and other income                                          |                                       |         | 1,191  |        |      |         | 2,914  |        |   |        | 2,403  |       
|                                                                                                                                                            | Interest expense                                                   |                                       |         | (528   | )      |      |         | (235   | )      |   |        | (503   | )     
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|Loss before provision for income taxes                                                                                                                      |                                                                    |                                       | (13,641 | )      |        |      | (20,795 | )      |        |   | (7,521 | )     
|Provision for income tax                                                                                                                                    |                                                                    |                                       | (217    | )      |        |      |        |        |        |   |       |       
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|Net loss                                                                                                                                                    |                                                                    | $                                     | (13,858 | )      |        | $    | (20,795 | )      |        | $ | (7,521 | )     
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|Net loss per common share, basic and diluted                                                                                                                |                                                                    | $                                     | (0.70   | )      |        | $    | (1.09   | )      |        | $ | (0.79  | )     
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|Weighted-average shares used in computing net
    loss per common share, basic and diluted                                                                  |                                                                    |                                       | 19,876  |        |        |      | 19,048  |        |        |   | 9,538  |       
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                                                                                                           
|Note 1: Research and development expenses
    and selling, general and administrative expenses include charges
    for stock-based compensation as follows:
|                                                                                                                                                           
|Research and development                                                                                                                                    |                                                                    | $                                     | 145     |        |        | $    | 603     |        |        | $ | 1,191  |       
|Selling, general and administrative                                                                                                                         |                                                                    |                                       | 126     |        |        |      | 1,087   |        |        |   | 2,296  |       
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                                                                                                            |                                                                    | $                                     | 271     |        |        | $    | 1,690   |        |        | $ | 3,487  |       
|                                                                                                                                                            |                                                                    |                                       |         |        |        |      |         |        |        |   |        |       

See accompanying notes.

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ARGONAUT TECHNOLOGIES, INC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |         |      |         |  
|----------------------------- | ------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------ | ------------ | - | ---------- | - | -------- | - | ----------- | ---------- | ------------- | - | ------------- | - | ----------- | - | ------ | ------- | ------ | - | - | ------ | ------ | - | - | ------- | ------- | - | - | --- | - | ---- | - | ------ | ------- | ---- | ------- | -
|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   | Accumulated |   |       
|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            | Other         |   |              
|                              |                                                                                                               | Preferred Stock                          |                          | Common Stock |   | Additional |   | Deferred |   |             |            | Comprehensive |   | Total        
|                              |                                                                                                               |                                          |                          |              |   | Paid-In    |   | Stock    |   | Accumulated |            | Income        |   | Stockholders
|                              |                                                                                                               | Shares                                   |                          | Amount       |   | Shares     |   | Amount   |   | Capital     |            | Compensation  |   | Deficit       |   | (Loss)      |   | Equity
|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |       
|                              |                                                                                                               |                                         
|                              |                                                                                                               | (In thousands, except share data)       
|BALANCES AT DECEMBER 31, 1999 |                                                                                                               |                                          | 11,339,268               |              |   | $          | 1 |          |   |             | 2,342,573  |               |   | $             |  |             |   | $      | 39,069  |        |   | $ | (3,106 | )      |   | $ | (26,918 | )       |   | $ | 2   |   |      | $ | 9,048  |        
|                              | Net loss                                                                                                      |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         |       |   |   |        |       |   |   |         | (7,521  | ) |   |     |  |      |   |        | (7,521  | )   
|                              | Other comprehensive loss:                                                                                     |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |         |     
|                              |                                                                                                               | Foreign currency translation adjustments |                          |              |  |            |   |          |  |             |            |               |  |               |   |             |  |        |         |        |  |   |        |        |  |   |         |         |  |   |     |   | (73  | ) |        |         | (73  | )      
|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |        
|                              |                                                                                                               |                                          | Total comprehensive loss |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |         |      | (7,594  | )
|                              | Issuance of common stock upon exercise of stock
    options, net of repurchase                                |                                          |                          |             |   |            |   |         |   |             |            | 658,898       |   |               |   |            |   |        |         | 320    |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 320     |     
|                              | Issuance of common stock upon the completion of
    initial public offerings, net of issuance costs of $6,891 |                                          |                          |             |   |            |   |         |   |             |            | 5,290,000     |   |               |   | 1           |   |        |         | 72,458 |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 72,459  |     
|                              | Conversion of preferred stock upon close of
    initial public offering at an exchange rate of 0.88 for 1     |                                          |                          | (11,339,268  | ) |            |   | (1       | ) |             |            | 9,978,548     |   |               |   | 1           |   |        |         |       |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        |        |     
|                              | Compensation expense related to issuance of
    options to consultants                                        |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         | 617    |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 617     |     
|                              | Deferred stock compensation                                                                                   |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         | 2,819  |   |   |        | (2,819 | ) |   |         |        |   |   |     |  |      |   |        |        |     
|                              | Amortization of deferred stock compensation                                                                   |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         |       |   |   |        | 2,870  |   |   |         |        |   |   |     |  |      |   |        | 2,870   |     
|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |        
|BALANCES AT DECEMBER 31, 2000 |                                                                                                               |                                          |                         |              |   |            |  |          |   |             | 18,270,019 |               |   |               | 2 |             |   |        | 115,283 |        |   |   | (3,055 | )      |   |   | (34,439 | )       |   |   | (71 | ) |      |   | 77,720 |        
|                              | Net loss                                                                                                      |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         |       |   |   |        |       |   |   |         | (20,795 | ) |   |     |  |      |   |        | (20,795 | )   
|                              | Other comprehensive income (loss):                                                                            |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |         |     
|                              |                                                                                                               | Unrealized gain on investments           |                          |              |  |            |   |          |  |             |            |               |  |               |   |             |  |        |         |        |  |   |        |        |  |   |         |         |  |   |     |   | 173  |   |        |         | 173  |        
|                              |                                                                                                               | Foreign currency translation adjustments |                          |              |  |            |   |          |  |             |            |               |  |               |   |             |  |        |         |        |  |   |        |        |  |   |         |         |  |   |     |   | (134 | ) |        |         | (134 | )      
|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |        
|                              |                                                                                                               |                                          | Total comprehensive loss |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |         |      | (20,756 | )
|                              | Issuance of common stock upon exercise of stock
    options, net of repurchase                                |                                          |                          |             |   |            |   |         |   |             |            | 209,030       |   |               |   |            |   |        |         | 190    |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 190     |     
|                              | Issuance of common stock related to the
    acquisition of Camile Products, LLC                               |                                          |                          |             |   |            |   |         |   |             |            | 666,667       |   |               |   |            |   |        |         | 4,667  |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 4,667   |     
|                              | Issuance of common stock related to employee
    stock purchase plan                                          |                                          |                          |             |   |            |   |         |   |             |            | 95,495        |   |               |   |            |   |        |         | 323    |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 323     |     
|                              | Issuance of shares of common stock upon exercise
    of warrants                                              |                                          |                          |             |   |            |   |         |   |             |            | 40,480        |   |               |   |            |   |        |         |       |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        |        |     
|                              | Compensation expense related to issuance of
    options to consultants                                        |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         | 137    |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 137     |     
|                              | Deferred stock compensation associated with stock
    options cancelled                                       |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         | (564   | ) |   |        | 494    |   |   |         |        |   |   |     |  |      |   |        | (70     | )   
|                              | Amortization of deferred stock compensation                                                                   |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         |       |   |   |        | 1,553  |   |   |         |        |   |   |     |  |      |   |        | 1,553   |     
|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |        
|BALANCES AT DECEMBER 31, 2001 |                                                                                                               |                                          |                         |              |   |            |  |          |   |             | 19,281,691 |               |   |               | 2 |             |   |        | 120,036 |        |   |   | (1,008 | )      |   |   | (55,234 | )       |   |   | (32 | ) |      |   | 63,764 |        
|                              | Net loss                                                                                                      |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         |       |   |   |        |       |   |   |         | (13,858 | ) |   |     |  |      |   |        | (13,858 | )   
|                              | Other comprehensive income (loss):                                                                            |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |         |     
|                              |                                                                                                               | Unrealized loss on investments           |                          |              |  |            |   |          |  |             |            |               |  |               |   |             |  |        |         |        |  |   |        |        |  |   |         |         |  |   |     |   | (167 | ) |        |         | (167 | )      
|                              |                                                                                                               | Foreign currency translation adjustments |                          |              |  |            |   |          |  |             |            |               |  |               |   |             |  |        |         |        |  |   |        |        |  |   |         |         |  |   |     |   | 488  |   |        |         | 488  |        
|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |        
|                              |                                                                                                               |                                          | Total comprehensive loss |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |         |      | (13,537 | )
|                              | Issuance of common stock upon exercise of stock
    options, net of repurchase                                |                                          |                          |             |   |            |   |         |   |             |            | 92,769        |   |               |   |            |   |        |         | 81     |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 81      |     
|                              | Issuance of common stock related to the
    acquisition of Jones Chromatography, Ltd.                         |                                          |                          |             |   |            |   |         |   |             |            | 572,152       |   |               |   |            |   |        |         | 1,829  |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 1,829   |     
|                              | Issuance of common stock related to employee
    stock purchase plan                                          |                                          |                          |             |   |            |   |         |   |             |            | 119,096       |   |               |   |            |   |        |         | 152    |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 152     |     
|                              | Stock repurchase                                                                                              |                                          |                          |             |   |            |   |         |   |             |            | (50,000       | ) |               |   |            |   |        |         | (47    | ) |   |        |       |   |   |         |        |   |   |     |  |      |   |        | (47     | )   
|                              | Compensation expense related to issuance of
    options to consultants                                        |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         | 49     |   |   |        |       |   |   |         |        |   |   |     |  |      |   |        | 49      |     
|                              | Deferred stock compensation associated with stock
    options cancelled                                       |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         | (712   | ) |   |        | 712    |   |   |         |        |   |   |     |  |      |   |        |        |     
|                              | Amortization of deferred stock compensation                                                                   |                                          |                          |             |   |            |   |         |   |             |            |              |   |               |   |            |   |        |         |       |   |   |        | 222    |   |   |         |        |   |   |     |  |      |   |        | 222     |     
|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |        
|BALANCES AT DECEMBER 31, 2002 |                                                                                                               |                                          |                         |              |   | $          |  |          |   |             | 20,015,708 |               |   | $             | 2 |             |   | $      | 121,388 |        |   | $ | (74    | )      |   | $ | (69,092 | )       |   | $ | 289 |   |      | $ | 52,513 |        
|                              |                                                                                                               |                                          |                          |              |   |            |   |          |   |             |            |               |   |               |   |             |   |        |         |        |   |   |        |        |   |   |         |         |   |   |     |   |      |   |        |        

See accompanying notes.

38



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |       |        |         |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------ | -------------------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | ------- | ----- | ----- | ------- | ------- | ----- | ------ | ------- | -
|                                                                                |                                                                    |                                                         
|                                                                                |                                                                    | Years Ended December 31,                                
|                                                                                |                                                                    |                                                         
|                                                                                |                                                                    | 2002                                                     |                                                         | 2001    |        | 2000   
|                                                                                |                                                                    |                                                          |                                                         |         |        |        
|                                                                                |                                                                    |                                                         
|                                                                                |                                                                    | (In thousands)                                          
|Operating Activities                                                            |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Net loss                                                                        |                                                                    | $                                                        | (13,858                                                 | )       |        | $       | (20,795 | )     |       | $       | (7,521  | )    
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|                                                                                | Depreciation and amortization                                      |                                                          |                                                         | 1,467   |        |         |         | 518   |       |         |         | 723   |       
|                                                                                | Amortization of goodwill and other purchased
    intangible assets |                                                          |                                                         | 785     |        |         |         | 1,157 |       |         |         |      |       
|                                                                                | Stock-based compensation                                           |                                                          |                                                         | 222     |        |         |         | 1,620 |       |         |         | 3,487 |       
|                                                                                | Issuance of equity for non-cash benefits                           |                                                          |                                                         | 49      |        |         |         |      |       |         |         |      |       
|                                                                                | Impairment charges                                                 |                                                          |                                                         |        |        |         |         | 5,520 |       |         |         |      |       
|                                                                                | Acquired in-process research and development                       |                                                          |                                                         |        |        |         |         | 270   |       |         |         |      |       
|                                                                                | Non-cash portion of restructuring charges                          |                                                          |                                                         | 683     |        |         |         | 22    |       |         |         |       |       
|                                                                                | Change in cumulative translation adjustment                        |                                                          |                                                         | 104     |        |         |         | (134  | )     |         |         | (73   | )     
|                                                                                | Changes in assets and liabilities:                                 |                                                          |                                                         |         |        |         |         |       |       |         |         |       |       
|                                                                                |                                                                    | Accounts receivable                                      |                                                         |         | 2,271  |         |         |       | 357   |         |         |       | (626   | )      
|                                                                                |                                                                    | Inventories                                              |                                                         |         | 197    |         |         |       | (739  | )       |         |       | (672   | )      
|                                                                                |                                                                    | Note receivable from officer                             |                                                         |         |       |         |         |       | 200   |         |         |       |       |        
|                                                                                |                                                                    | Prepaid expenses and other current assets                |                                                         |         | 79     |         |         |       | 83    |         |         |       | (232   | )      
|                                                                                |                                                                    | Other assets                                             |                                                         |         | 75     |         |         |       | 138   |         |         |       |       |        
|                                                                                |                                                                    | Accounts payable                                         |                                                         |         | (1,304 | )       |         |       | 331   |         |         |       | 139    |        
|                                                                                |                                                                    | Accrued compensation                                     |                                                         |         | (365   | )       |         |       | 284   |         |         |       | 341    |        
|                                                                                |                                                                    | Other accrued liabilities                                |                                                         |         | (106   | )       |         |       | 225   |         |         |       | 552    |        
|                                                                                |                                                                    | Deferred revenue                                         |                                                         |         | (1,255 | )       |         |       | 1,486 |         |         |       | (1,074 | )      
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|                                                                                |                                                                    |                                                          | Net cash used in operating activities                   |         |        | (10,956 | )       |       |       | (9,457  | )       |       |        | (4,956  | )
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Investing Activities                                                            |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Capital expenditures                                                            |                                                                    |                                                          | (781                                                    | )       |        |         | (1,779  | )     |       |         | (846    | )    
|Business acquisition (net of cash received)                                     |                                                                    |                                                          | (6,464                                                  | )       |        |         | (4,255  | )     |       |         |        |      
|Purchase of short-term investments                                              |                                                                    |                                                          | (10,749                                                 | )       |        |         | (49,498 | )     |       |         | (34,309 | )    
|Proceeds from the sales of short-term investments                               |                                                                    |                                                          | 4,910                                                   |         |        |         |        |       |       |         |        |      
|Proceeds from the maturities of short-term
    investments                      |                                                                    |                                                          | 39,309                                                  |         |        |         | 44,260  |       |       |         | 6,211   |      
|Purchases of licenses                                                           |                                                                    |                                                          | (1,400                                                  | )       |        |         |        |       |       |         |        |      
|Restricted cash                                                                 |                                                                    |                                                          | (10,863                                                 | )       |        |         |        |       |       |         |        |      
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|                                                                                |                                                                    |                                                          | Net cash provided (used) in investing
    activities    |         |        | 13,962  |         |       |       | (11,272 | )       |       |        | (28,944 | )
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Financing Activities                                                            |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Proceeds from capital lease obligations                                         |                                                                    |                                                          | 94                                                      |         |        |         |        |       |       |         |        |      
|Repayment of long-term debt                                                     |                                                                    |                                                          | (200                                                    | )       |        |         | (654    | )     |       |         | (4,375  | )    
|Principal payments on capital lease obligations                                 |                                                                    |                                                          | (187                                                    | )       |        |         | (281    | )     |       |         | (303    | )    
|Repurchase of stock                                                             |                                                                    |                                                          | (47                                                     | )       |        |         |        |       |       |         |        |      
|Net proceeds from issuances of common stock                                     |                                                                    |                                                          | 233                                                     |         |        |         | 513     |       |       |         | 72,779  |      
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|                                                                                |                                                                    |                                                          | Net cash provided by (used in) financing
    activities |         |        | (107    | )       |       |       | (422    | )       |       |        | 68,101  |  
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Net increase (decrease) in cash and cash
    equivalents                        |                                                                    |                                                          | 2,899                                                   |         |        |         | (21,151 | )     |       |         | 34,201  |      
|Cash and cash equivalents at beginning of year                                  |                                                                    |                                                          | 17,996                                                  |         |        |         | 39,147  |       |       |         | 4,946   |      
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Cash and cash equivalents at end of year                                        |                                                                    | $                                                        | 20,895                                                  |         |        | $       | 17,996  |       |       | $       | 39,147  |      
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Supplemental Disclosure of Cash Flow
    Information                            |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Interest paid                                                                   |                                                                    | $                                                        | 426                                                     |         |        | $       | 42      |       |       | $       | 380     |      
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Supplemental Disclosure of Cash Flow
    Information                            |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Deferred stock compensation (cancellations)                                     |                                                                    | $                                                        | (712                                                    | )       |        | $       | (494    | )     |       | $       | 2,819   |      
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|Cash flow for acquisition of Jones Group                                        |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|                                                                                | Tangible assets acquired                                           |                                                          | $                                                       | 8,542   |        |         |         |       |       |         |         |       |       
|                                                                                | Goodwill and other intangible assets acquired                      |                                                          |                                                         | 13,750  |        |         |         |       |       |         |         |       |       
|                                                                                | Acquisition costs incurred                                         |                                                          |                                                         | (875    | )      |         |         |       |       |         |         |       |       
|                                                                                | Liabilities assumed                                                |                                                          |                                                         | (2,261  | )      |         |         |       |       |         |         |       |       
|                                                                                | Notes payable issued                                               |                                                          |                                                         | (10,863 | )      |         |         |       |       |         |         |       |       
|                                                                                | Common stock issued                                                |                                                          |                                                         | (1,829  | )      |         |         |       |       |         |         |       |       
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      
|                                                                                |                                                                    | Cash paid for acquisition (net of $28 cash
    received) |                                                         | $       | 6,464  |         |         |       |       |         |         |       |        |        
|                                                                                |                                                                    |                                                          |                                                         |         |        |         |         |       |       |         |         |      

See accompanying notes.

39



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1.     Summary
of Significant Accounting Policies

Nature of
Operations and Basis of Presentation

Argonaut Technologies, Inc. (the
Company) was incorporated in the state of Delaware
on November 10, 1994. The Company is a leader in the
development, manufacturing and marketing of innovative products
designed to help chemists engaged in the discovery and
development of new molecules increase their productivity and
reduce their operating costs without compromising the scientific
integrity of their research. Pharmaceutical, biotechnology and
chemical industry organizations worldwide have implemented the
Companys solutions to achieve faster time to market for
new products. The Companys products include a variety of
instruments and chemistry consumables that enable chemists to
increase their productivity, accelerate the drug development
process and reduce costs. Its principal markets are in the
United States, Western Europe, and the Far East.

The Company has five wholly owned subsidiaries,
Argonaut Technologies Systems, Inc. (formerly Camile Products,
LLC.) in Indiana, Argonaut Technologies KK in Japan,
Argonaut Technologies AG in Switzerland, Argonaut
Technologies, Ltd. (formerly Jones Chromatography, Ltd.) in
Cardiff, Wales, United Kingdom and Jones Chromatography, Inc. in
Foster City, California.

Principles of
Consolidation

The consolidated financial statements include the
accounts and results of operations of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated on consolidation.

Reclassification

Certain reclassifications have been made to the
prior years financial statements to conform to the current
year presentation. These reclassifications had no effect on
previously reported results of operations or retained earnings.

Foreign
Currency Translation

The Company translates the assets and liabilities
of its foreign subsidiaries stated in local functional
currencies to U.S. dollars at the rates of exchange in
effect at the end of the period. Revenues and expenses are
translated using rates of exchange in effect during the period.
Gains and losses from translation of financial statements
denominated in foreign currencies, if material, are included as
a separate component of other comprehensive income (loss) in the
Consolidated Statements of Stockholders Equity.

The Company records foreign currency transactions
at the exchange rate prevailing at the date of the transaction.
Monetary assets and liabilities denominated in foreign currency
are retranslated at the exchange rates in effect at the balance
sheet date. All translation differences arising from foreign
currency transactions are recorded through profit and loss. The
Company recorded foreign currency translation gains (losses) of
approximately $104,000, ($134,000), and ($73,000), for 2002,
2001, and 2000, respectively.

Use of
Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from these estimates.

40



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Cash, Cash
Equivalents, and Short-Term Investments

The Company invests its excess cash in deposits,
money market accounts, and high quality marketable debt
securities. The Company considers all highly liquid investments
with a maximum original maturity of 90 days or less at the
time of purchase to be cash equivalents.

The Company accounts for its investments in
marketable securities in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115). Management
determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each
balance sheet date. The Companys short-term investments
are classified as available-for-sale and are carried at fair
market value. The fair market value is based upon market prices
quoted on the last day of the fiscal year., with unrealized
gains and losses reported as a separate component of other
comprehensive income (loss) in the statement of
stockholders equity, if material. Realized gains and
losses and declines in value judged to be other-than-temporary,
if any, on short-term investments are included in other income.
The cost of securities sold is based on the specific
identification method. Interest on securities classified as
available-for-sale is included in interest income.

Restricted
Cash

In connection with the acquisition of Jones
Group, the Company deposited $10.9 million
(£7,650,000) denominated in British Pounds Sterling as
collateral for the notes payable issued in the same amount and
recorded the deposit as restricted cash. The restricted cash
serves as collateral for the guarantee by Barclays Bank PLC of
the notes payable principal and interest. The restricted cash is
invested in money market instruments to yield rates approximate
to the interest rates due on the notes payable.

Revenue
Recognition

For each arrangement, the Company determines
whether persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, collectibility is
reasonably assured and fees are fixed or determinable. If any of
these criteria are not met, revenue recognition is deferred
until all of the criteria are met.

Product
Revenue

Revenue related to product sales with no future
obligation is recognized upon shipment when the recognition
criteria have been met. For those products where we have
obligations to provide installation services, revenue is
recognized upon installation when the recognition criteria have
been met. Sales that require customer acceptance are not
recognized as revenue until the requirements have been met.

Services
Revenue

Maintenance contract revenue, including revenue
for extended warranties, is recognized ratably over the term of
the contract; training, contract research and development, and
other services revenue is recognized as the services are
rendered.

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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Shipping and
Handling Costs

Shipping and handling costs are classified as a
component of cost of products.

Product
Warranty

The Company generally warrants its equipment for
a period of one year and provides a reserve for estimated
warranty costs concurrent with the recognition of revenue. The
Company also sells warranty extensions and the related revenue
is recognized ratably over the term of the extension. Warranty
costs incurred during the extension period are expensed as
incurred.

Changes in the Companys product warranty
accrual for the year ended December 31, 2002 is as follows
(in thousands):

|                                     |  |        |      |  
|------------------------------------ |  | ------ | ---- | -
|                                     |  | Amount
|                                     |  |       
|Balance at December 31, 2001         |  | $      | 392  |  
|Expense incurred for warranty repair |  |        | (161 | )
|Reduction in warranty accrual        |  |        | (20  | )
|                                     |  |        |      |  
|Balance at December 31, 2002         |  | $      | 211  |  
|                                     |  |        |      |  

Software
Development Costs

Software development costs included in the
research and development of new products and enhancements to
existing products are expensed as incurred until technological
feasibility in the form of a working model has been established.
To date, software development costs subsequent to reaching
feasibility have not been significant and accordingly, no costs
have been capitalized.

Advertising
Costs

Advertising costs are accounted for as expenses
in the period in which they are incurred. Advertising expense
for 2002, 2001, and 2000 was $1.3 million, $696,000,
$373,000, respectively.

Allowance for
Doubtful Accounts

The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
its customers to make required payments. The Company evaluates
the collectibility of its trade accounts receivable based on a
number of factors. In circumstances where the Company is aware
of a specific customers inability to meet its financial
obligations to the Company, a specific allowance for bad debts
is estimated and recorded which reduces the recognized
receivable to the estimated amount the Company believes will
ultimately be collected. In addition to specific customer
identification of potential bad debts, bad debt charges are
recorded based on the Companys recent past loss history
and an overall assessment of past due trade accounts receivable
amounts outstanding. The expenses recorded for doubtful accounts
were approximately $58,000 in 2002, $104,000 in 2001, and zero
in 2000.

Inventories

Inventories are stated at the lower of cost (on a
first-in, first-out cost method) or market value. The Company
records adjustments to the value of inventory based upon the
forecasted plans to sell the inventories. The physical condition
(e.g., age and quality) of the inventories is also considered in
establishing its valuation. These adjustments are estimates,
which could vary significantly, either favorably or unfavorably,
from actual requirements if future economic conditions, customer
inventory levels or competitive conditions differ from our
expectations.

42



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Property and
Equipment

Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are calculated using the straight-line method over
the estimated useful lives of the assets, which range from two
to five years. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life.

Impairment of
Long-Lived Assets

Long-lived assets are reviewed for impairment
when events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. In the event that such cash
flows are not expected to be sufficient to recover the carrying
amount of the assets, the assets are written down to their
estimated fair values.

In August 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144) that is applicable to financial
statements issued for fiscal years beginning after
December 15, 2001. These new rules on asset impairment
supersede SFAS 121 and provide a single accounting model
for disposal of long-lived assets. SFAS 144 removes
goodwill from its scope, describes a profitability-weighted cash
flow estimation approach to deal with situations in which
alternative courses of action to recover the carrying amount of
a long-lived asset are under consideration or a range is
estimated for the amount of possible future cash flows, and
establishes a primary-asset approach to determine
the cash flow estimation period for a group of assets and
liabilities that represents the unit of accounting for a
long-lived asset to be held and used. The adoption of
SFAS 144 on January 1, 2002 did not have a material
adverse effect on the Companys results of operations,
financial position, or cash flows.

Goodwill and
Other Purchased Intangible Assets

In June 2001, the FASB issued SFAS 141,
Business Combinations (SFAS 141),
and SFAS 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141
also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001.
SFAS 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives. SFAS 142
requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to
be amortized over their estimated useful lives. Additionally,
SFAS 142 requires that goodwill included in the carrying
value of equity method investments no longer be amortized.

Goodwill and other purchased intangible assets
with indefinite lives have resulted from the acquisition of ATSI
and the Jones Group. Goodwill and other intangible assets with
indefinite lives are not amortized subsequent to the
Companys adoption of SFAS 142. The Company adopted
SFAS 142 on January 1, 2002. The Company reclassified
$763,000 of identifiable intangible assets with indefinite
lives, as defined by SFAS 142, to goodwill at the date of
adoption. The Company tested for goodwill and indefinite lived
intangible assets impairment using the two-step process
prescribed by SFAS 142. The first step is a screen for
potential impairment, while the second step measures the amount
of impairment by reporting unit, if any. The Company performed
the first step of the required impairment test of goodwill and
indefinite lived intangible assets in the second quarter of
fiscal 2002, determining that no impairment was indicated.

The Company performed the annual test for
impairment of intangible assets with indefinite lives as
prescribed by SFAS 142 during the fourth quarter of fiscal
2002, determining that no impairment was indicated. The Company
determined the fair value of intangible assets with indefinite
lives based on a present value analysis of the discounted future
cash flows.

43



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following pro forma information reflects the
impact on net loss and net loss per share assuming the adoption
of SFAS 142 had occurred on January 1, 2001:

|                                                                                                       |                                                                                                          |                                       |         |             |   |             |         |       |   |   |        |       |  
|------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ----------- | - | ----------- | ------- | ----- | - | - | ------ | ----- | -
|                                                                                                       |                                                                                                          |                                      
|                                                                                                       |                                                                                                          | Years Ended December 31,             
|                                                                                                       |                                                                                                          |                                      
|                                                                                                       |                                                                                                          |                                       |         | 2001        |   | 2000       
|                                                                                                       |                                                                                                          | 2002                                  |         | (Pro forma) |   | (Pro forma)
|                                                                                                       |                                                                                                          |                                       |         |             |   |            
|                                                                                                       |                                                                                                          |                                      
|                                                                                                       |                                                                                                          | (In thousands, except per share data)
|Reported net loss                                                                                      |                                                                                                          | $                                     | (13,858 | )           |   | $           | (20,795 | )     |   | $ | (7,521 | )    
|Amortization of goodwill and identifiable
    intangible assets with indefinite lives                  |                                                                                                          |                                       |        |             |   |             | 827     |       |   |   |       |      
|                                                                                                       |                                                                                                          |                                       |         |             |   |             |         |       |   |   |        |      
|Pro forma net loss                                                                                     |                                                                                                          | $                                     | (13,858 | )           |   | $           | (19,968 | )     |   | $ | 7,521  |      
|                                                                                                       |                                                                                                          |                                       |         |             |   |             |         |       |   |   |        |      
|Basic and diluted net loss per share:                                                                  |                                                                                                          |                                       |         |             |   |             |         |       |   |   |        |      
|                                                                                                       | Reported net loss per share                                                                              |                                       | $       | (0.70       | ) |             | $       | (1.09 | ) |   | $      | (0.79 | )
|                                                                                                       | Adjustment related to goodwill and identifiable
    intangible assets with indefinite lives amortization |                                       |         |            |   |             |         | 0.04  |   |   |        |      |  
|                                                                                                       |                                                                                                          |                                       |         |             |   |             |         |       |   |   |        |      
|                                                                                                       | Pro forma net loss per share                                                                             |                                       | $       | (0.70       | ) |             | $       | (1.05 | ) |   | $      | (0.79 | )
|                                                                                                       |                                                                                                          |                                       |         |             |   |             |         |       |   |   |        |      
|Outstanding shares used in calculating reported
    and pro forma basic and diluted net loss per share |                                                                                                          |                                       | 19,876  |             |   |             | 19,048  |       |   |   | 9,538  |      
|                                                                                                       |                                                                                                          |                                       |         |             |   |             |         |       |   |   |        |      

The amortization expense relating to the
intangible assets for the year ended December 31, 2002 was
$735,000. The following represents the gross carrying amounts
and accumulated amortization of amortized intangible assets at
December 31, 2002:

|                             |                      |          |   |              |       |  |   |      |      |  
|---------------------------- | -------------------- | -------- | - | ------------ | ----- |  | - | ---- | ---- | -
|                             |                      | Gross    |   |             
|                             |                      | Carrying |   | Accumulated 
|                             |                      | Amount   |   | Amortization
|                             |                      |          |   |             
|Amortized intangible assets: |                      |          |   |              |       |  |   |     
|                             | Completed technology |          | $ | 5,539        |       |  | $ | (691 | )   
|                             | Licenses             |          |   | 1,400        |       |  |   | (50  | )   
|                             | Tradenames           |          |   | 250          |       |  |   | (23  | )   
|                             |                      |          |   |              |       |  |   |     
|                             |                      | Total    |   | $            | 7,189 |  |   | $    | (764 | )
|                             |                      |          |   |              |       |  |   |     

The estimated amortization expense for each of
the succeeding five years is as follows (in thousands):

|                                |                                |  |   |       | 
|------------------------------- | ------------------------------ |  | - | ----- | 
|Estimated amortization expense: |                                |  |   |      
|                                | For the year ending 12/31/2003 |  | $ | 992   | 
|                                | For the year ending 12/31/2004 |  |   | 1,026 | 
|                                | For the year ending 12/31/2005 |  |   | 855   | 
|                                | For the year ending 12/31/2006 |  |   | 805   | 
|                                | For the year ending 12/31/2007 |  |   | 742   | 

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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The weighted average amortization period
remaining of the amortized intangible assets at
December 31, 2002 is as follows (years):

|                             |                      |       |  |     |     | 
|---------------------------- | -------------------- | ----- |  | --- | --- | 
|                             |                      | Years
|                             |                      |      
|Amortized intangible assets: |                      |       |  |    
|                             | Completed technology |       |  | 7.8 |    
|                             | Licenses             |       |  | 7.0 |    
|                             | Tradenames           |       |  | 8.2 |    
|                             |                      |       |  |    
|                             |                      | Total |  |     | 7.7 | 
|                             |                      |       |  |    

The carrying amount of indefinite lived
intangible assets at December 31, 2002 is as follows (in
thousands):

|                               |                                                 |       |   |       |        | 
|------------------------------ | ----------------------------------------------- | ----- | - | ----- | ------ | 
|Unamortized intangible assets: |                                                 |       |   |      
|                               | Assembled workforce                             |       | $ | 1,892 |       
|                               | Customer base                                   |       |   | 1,551 |       
|                               | Goodwill and indefinite lived intangible assets |       |   | 6,730 |       
|                               |                                                 |       |   |      
|                               |                                                 | Total |   | $     | 10,173 | 
|                               |                                                 |       |   |      

The changes in the carrying amount of goodwill
for the year ended December 31, 2002 are as follows (in
thousands):

|                              |  |   |        | 
|----------------------------- |  | - | ------ | 
|Balance at January 1, 2002    |  | $ | 763    | 
|Goodwill acquired during year |  |   | 9,410  | 
|                              |  |   |        | 
|Balance at December 31, 2002  |  | $ | 10,173 | 
|                              |  |   |        | 

Concentrations
of Risk

Financial instruments that potentially subject
the Company and its subsidiaries to concentrations of credit
risk consist primarily of cash, cash equivalents, short-term
investments and accounts receivable. In addition, the Company
outsources part of its manufacturing process to third party
contractors. There are no other third party contractors who
could readily assume this manufacturing function on short
notice. Any delay in production could result in failure to meet
customer demand.

Cash equivalents and short-term investments are
financial instruments, which potentially subject the Company to
concentration of risk to the extent recorded on the balance
sheet. Management of the Company believes it has established
guidelines for investment of its excess cash relative to
diversification and maturities that maintain safety and
liquidity.

The majority of cash, cash equivalents and
short-term investments are invested in major financial
institutions in the United States. Such deposits may be in
excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial
institutions that hold the Companys investments are
financially sound and, accordingly, minimal credit risk exists
with respect to these investments.

The accounts receivable of the Company and its
subsidiaries are derived from sales to customers located
primarily in the United States and Europe. The Company performs
ongoing credit evaluations of its customers.

An allowance for doubtful accounts is determined
with respect to those amounts that the Company has determined to
be doubtful of collection. At December 31, 2002 and 2001,
no customer accounted for 10% or

45



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

more of the Companys accounts receivable
balance. At December 31, 2002 and 2001, accounts receivable
due from foreign customers as a percent of total trade
receivables were 48% and 26%, respectively. The Company
generally does not require collateral.

The Company has no off-balance-sheet
concentration of credit risk such as foreign exchange contracts,
option contracts, or other hedging arrangements.

Accounting
for Stock-Based Compensation

The Company accounts for its stock-based employee
compensation as permitted by Statement of Financial Accounting
Standard No. 123, Accounting for Stock-Based
Compensation (SFAS 123), whereby
stock-based employee compensation arrangements are accounted for
under the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). Under
APB 25, when the exercise price of the Companys stock
options is less than the market price of the underlying shares
on the date of grant, compensation expense is recognized. Pro
forma information regarding net loss per share is required by
SFAS 123 as if the Company had accounted for its employee
stock options under the fair value method of SFAS 123. The
fair value of these options granted prior to the Companys
initial public offering in July 2000 was estimated at the
date of grant using the minimum value method. The fair value of
stock options granted subsequent to the initial public offering
were valued using the Black-Scholes valuation model based on the
actual stock closing price on the date of grant. The fair value
of these options was estimated at the date of grant using the
following weighted-average assumptions:

|                               |  |                          |         |      |  |      |         |  |  |  |         | 
|------------------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                               |  |                         
|                               |  | Years Ended December 31,
|                               |  |                         
|                               |  | 2002                     |         | 2001 |  | 2000
|                               |  |                          |         |      |  |     
|Risk-free interest rate        |  |                          | 3.61%   |      |  |      | 3.82%   |  |  |  | 5.00%   | 
|Dividend yield                 |  |                          |        |      |  |      |        |  |  |  |        | 
|Weighted-average expected life |  |                          | 4 years |      |  |      | 4 years |  |  |  | 6 years | 
|Volatility                     |  |                          | 0.94    |      |  |      | 0.87    |  |  |  | 0.90    | 

The fair value of shares purchased in the
Companys Employee Stock Purchase Plan (the Purchase
Plan) was estimated at the date of purchase using the
following weighted-average assumptions:

|                               |  |  |           | 
|------------------------------ |  |  | --------- | 
|Risk-free interest rate        |  |  | 1.94%     | 
|Dividend yield                 |  |  |          | 
|Weighted-average expected life |  |  | 0.5 years | 
|Volatility                     |  |  | 0.94      | 

46



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The pro forma disclosures required by SFAS 123
are as follows (in thousands, except per share amounts):

|                                                                                                             |  |                          |         |      |  |      |         |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                                                             |  |                         
|                                                                                                             |  | Years Ended December 31,
|                                                                                                             |  |                         
|                                                                                                             |  | 2002                     |         | 2001 |  | 2000
|                                                                                                             |  |                          |         |      |  |     
|Net loss, as reported                                                                                        |  | $                        | (13,858 | )    |  | $    | (20,795 | ) |  | $ | (7,521 | )
|Stock-based employee compensation expense
    included in reported net loss                                  |  |                          | 271     |      |  |      | 1,690   |   |  |   | 3,487  |  
|Total stock-based employee compensation expense
    determined under fair value based methods for all awards |  |                          | (754    | )    |  |      | (2,647  | ) |  |   | (4,088 | )
|                                                                                                             |  |                          |         |      |  |      |         |   |  |   |        |  
|Pro forma net loss                                                                                           |  | $                        | (14,341 | )    |  | $    | (21,752 | ) |  | $ | (8,122 | )
|                                                                                                             |  |                          |         |      |  |      |         |   |  |   |        |  
|Basic and diluted net loss per common share, as
    reported                                                 |  | $                        | (0.70   | )    |  | $    | (1.09   | ) |  | $ | (0.79  | )
|                                                                                                             |  |                          |         |      |  |      |         |   |  |   |        |  
|Pro forma basic and diluted net loss per common
    share                                                    |  | $                        | (0.72   | )    |  | $    | (1.14   | ) |  | $ | (0.85  | )
|                                                                                                             |  |                          |         |      |  |      |         |   |  |   |        |  

Equity instruments granted to non-employees are
accounted for using the Black-Scholes valuation model prescribed
by SFAS 123 and, in accordance with Emerging Issues Task Force
Consensus No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling Goods or
Services. The equity instruments are subject to periodic
revaluations over their vesting terms. The expense is recognized
as the instruments vest.



| |                   
| | ------------------
| | Comprehensive Loss

SFAS No. 130, Reporting Comprehensive
Income (SFAS 130), requires unrealized
gains or losses on the Companys short-term investments
designated as available-for-sale securities and foreign currency
translation adjustments to be included as part of total
comprehensive loss. Total comprehensive loss has been disclosed
in the consolidated statement of stockholders equity.



| |                   
| | ------------------
| | Net Loss Per Share

Net loss per share has been computed according to
the SFAS No. 128, Earnings Per Share, which
requires disclosure of basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of
options, shares subject to repurchase, warrants, and convertible
securities. Diluted earnings per share includes the impact of
potentially dilutive securities (calculated using the treasury
stock method).

Pro forma net loss per share includes shares
issuable upon the conversion of outstanding shares of preferred
stock (using the as-if-converted method) from the original date
of issuance.

A reconciliation of shares used in the
calculations is as follows (in thousands):

|                   |                                                                                                         |                          |   |        |   |      |   |        |   |  |   |        |  
|------------------ | ------------------------------------------------------------------------------------------------------- | ------------------------ | - | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                   |                                                                                                         |                         
|                   |                                                                                                         | Years Ended December 31,
|                   |                                                                                                         |                         
|                   |                                                                                                         | 2002                     |   | 2001   |   | 2000
|                   |                                                                                                         |                          |   |        |   |     
|Basic and diluted: |                                                                                                         |                          |   |        |   |      |   |        |   |  |   |       
|                   | Weighted-average shares of common stock
    outstanding                                                 |                          |   | 19,876 |   |      |   | 19,048 |   |  |   | 9,538  |  
|                   | Adjustment to reflect weighted-average effect of
    assumed conversions of preferred stock (unaudited) |                          |   |       |   |      |   |       |   |  |   | 5,471  |  
|                   |                                                                                                         |                          |   |        |   |      |   |        |   |  |   |       
|                   | Weighted-average shares used in pro forma net
    loss per share, basic and diluted (unaudited)         |                          |   | 19,876 |   |      |   | 19,048 |   |  |   | 15,009 |  
|                   |                                                                                                         |                          |   |        |   |      |   |        |   |  |   |       
|                   | Pro forma net loss per share, basic and diluted
    (unaudited)                                         |                          | $ | (0.70  | ) |      | $ | (1.09  | ) |  | $ | (0.50  | )
|                   |                                                                                                         |                          |   |        |   |      |   |        |   |  |   |       

47



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During all periods presented, the Company had
securities outstanding which could potentially dilute basic
earnings per common share in the future, but were excluded from
the computation of diluted net loss per common share, as their
effect would have been antidilutive. These outstanding
securities consist of the following (in thousands):

|                     |  |              |       |      |  |      |       |  |  |  |       | 
|-------------------- |  | ------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2002         |       | 2001 |  | 2000
|                     |  |              |       |      |  |     
|Outstanding options  |  |              | 4,062 |      |  |      | 2,875 |  |  |  | 1,616 | 
|Outstanding warrants |  |              | 81    |      |  |      | 81    |  |  |  | 125   | 



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In June 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 146 Accounting for Costs
Associated with Exit or Disposal Activities
(SFAS 146), effective for exit or disposal
activities that are initiated after December 31, 2002, with
early application encouraged. Under SFAS 146, a liability
for the cost associated with an exit or disposal activity is
recognized when the liability is incurred. Under prior guidance,
a liability for such costs could be recognized at the date of
commitment to an exit plan. The effect of adoption of
SFAS 146 is dependent on the Companys related
activities subsequent to the date of adoption.

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
elaborates on the existing disclosure requirements for most
guarantees, including residual value guarantees issued in
conjunction with operating lease agreements. It also clarifies
that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value of the
obligation it assumes under that guarantee and must disclose
that information in its interim and annual financial statements.
The initial recognition and initial measurement provisions apply
on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are
effective for financial statements of interim or annual periods
ending after December 15, 2002. The Companys adoption
of FIN 45 did not have a material impact on its
consolidated results of operations and financial position.

In December 2002, the FASB issued Statement
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure
(FAS 148). FAS 148 amends FAS 123
Accounting for Stock-Based Compensation to provide
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, FAS 148 amends the disclosure
requirements of FAS 123 to require more prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. The additional disclosure requirements of FAS 148
are effective for fiscal years ending after December 15,
2002. The Company has elected to continue to follow the
intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, to account
for employee stock options.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
(FIN 46). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after
January 31, 2003. The Company does not believe it has any
investments in variable interest entities and does not
anticipate any impact with the adoption of this interpretation.

48



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|        |                     
|------- | --------------------
|Note 2. | Business Combination

On February 20, 2002, Argonaut completed its
acquisition of Jones Chromatography Limited, a company organized
under the laws of England and Wales (JCL), and its
wholly owned subsidiaries International Sorbent Technology
(IST) and Jones Chromatography U.S.A., Inc.
(JCI) (together with JCL, Jones Group),
pursuant to a Share Purchase Agreement (the Purchase
Agreement), dated February 11, 2002, among Argonaut
and the stockholders of JCL.

The strategic acquisition of Jones Group creates
a combined company serving as a global provider of solutions for
chemistry development. The addition of Jones Group to Argonaut
strengthens and expands the Companys position in chemistry
consumables sales, and increases the Companys European
business. The Jones Group is a leading manufacturer and
distributor of high quality chromatography and purification
accessories, consumables and instrumentation. Consumable items
include leading brand sorbents, solid phase extraction
(SPE) columns and 96-well plates, flash
chromatography and High Performance Liquid Chromatography
(HPLC) columns. It manufactures purification and
other chemistry development instruments for the drug discovery
market.

In the transaction, the stockholders of JCL
exchanged all of their respective shares of JCLs stock for
(i) cash in an aggregate amount of £3,825,000
($5,431,500), (ii) 572,152 shares of unregistered Argonaut
Common Stock, and (iii) notes payable in the aggregate
principal amount of £7,650,000 ($10,863,000). The aggregate
purchase price, including transaction costs of $875,000, was
approximately $19.0 million. The notes payable, which are
redeemable for cash over a two year period following the closing
date, are guaranteed by Barclays Bank PLC. In addition, certain
employees of the Jones Group that remained as employees after
the transaction have received stock options to purchase an
aggregate 349,800 shares of Argonauts Common Stock.

All shares of Argonauts Common Stock issued
to JCLs stockholders in the transaction were issued in
reliance on exemptions from registration under the Securities
Act of 1933, as amended (the Securities Act). As a result, all
such shares of Argonauts Common Stock are subject to
restrictions on transfer under the applicable provisions of the
Securities Act. Under the terms of the Registration Rights
Agreement dated February 20, 2002, Argonaut has granted
JCLs stockholders certain rights to register under the
Securities Act the shares of Argonauts Common Stock
received in the transaction.

Immediately prior to the acquisition of the Jones
Group by the Company, the shareholders of JCL effected a series
of transactions whereby JCL acquired all of the shares in the
capital of IST and JCI which were not previously held by JCL.

The acquisition was accounted for under the
purchase method of accounting. The 572,152 shares of
unregistered Argonaut Common Stock issued in the transaction
were valued at $3.196 per share based on the average closing
price of Argonauts Common Stock on the Nasdaq National
Market System on the two trading days prior and two trading days
subsequent to the announcement date of the acquisition
(February 11, 2002).

The Consolidated Statements of Operations include
the results of Jones Group for the period from February 21,
2002 to December 31, 2002.

49



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company allocated the purchase price based on
the estimated fair value of the net tangible and intangible
assets acquired. Based on the information obtained from an
independent valuation, the Company allocated the purchase price
as follows (in thousands):

|                                                |                      |   |        |       | 
|----------------------------------------------- | -------------------- | - | ------ | ----- | 
|Net tangible assets                             |                      | $ | 5,250  |      
|Goodwill and other purchased intangible assets: |                      |   |        |      
|                                                | Completed technology |   |        | 4,090 | 
|                                                | Trade names          |   |        | 250   | 
|                                                | Goodwill             |   |        | 9,410 | 
|                                                |                      |   |        |      
|Total purchase price                            |                      | $ | 19,000 |      
|                                                |                      |   |        |      

Approximately $9.4 million of the total
purchase price has been allocated to goodwill and intangible
assets with indefinite lives. Goodwill represents the excess of
the purchase price of an acquired business over the fair value
of the underlying net tangible and intangible assets. In
accordance with the SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill and intangible assets with
indefinite lives resulting from business combinations completed
subsequent to June 30, 2001 will not be amortized, but
instead will be tested for impairment at least annually (more
frequently if certain indicators are present).

The following unaudited pro forma summary
presents the consolidated results of operations of the Company
as if the acquisition of Jones Group had occurred at the
beginning of 2001 and does not purport to be indicative of what
would have occurred had the acquisition been made as of those
dates or of results which may occur in the future.

|                   |  |                       |         |      |  |   |         |  
|------------------ |  | --------------------- | ------- | ---- |  | - | ------- | -
|                   |  |                      
|                   |  | Years Ended          
|                   |  | December 31,         
|                   |  |                      
|                   |  | 2002                  |         | 2001
|                   |  |                       |         |     
|                   |  |                      
|                   |  | (In thousands, except
|                   |  | per share data)      
|Total net sales    |  | $                     | 28,073  |      |  | $ | 30,526  |  
|Net loss           |  |                       | (13,756 | )    |  |   | (19,009 | )
|Net loss per share |  |                       | (0.69   | )    |  |   | (0.97   | )

On March 1, 2001, the Company acquired all
of the assets and certain liabilities of Camile Products, LLC
and renamed this subsidiary Argonaut Technologies Systems, Inc
(ATSI). ATSI markets solutions that allow
pharmaceutical and chemical companies to automate and precisely
control chemical reactions. The transaction was accounted for
using the purchase accounting method and accordingly, the
accompanying financial statements include the results of
operations of ATSI subsequent to the acquisition date. The
transaction was valued at approximately $9.0 million and
was comprised of $4.0 million cash, 666,667 shares of the
Companys common stock, and expenses related to the
transaction. The 666,667 shares were valued at $7.00 per common
share based on the closing price on the announcement date
(January 31, 2001) of the acquisition.

The total purchase cost of ATSI is as follows (in
thousands):

|                                |       |   |       |       | 
|------------------------------- | ----- | - | ----- | ----- | 
|Cash                            |       | $ | 4,000 |      
|Fair value of securities issued |       |   | 4,667 |      
|Transaction costs and expenses  |       |   | 290   |      
|                                |       |   |       |      
|                                | Total |   | $     | 8,957 | 
|                                |       |   |       |      

50



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company allocated the purchase price based on
the estimated fair value of the net tangible and intangible
assets acquired. In performing this allocation, the Company
considered, among other factors, the technology R&D projects
in process at the date of acquisition. With regard to the
in-process research and development projects, the Company
considered factors such as the stage of development of the
technology at the acquisition, the importance of each project to
the overall development plan, alternative future uses of the
technology and the projected incremental cash flows from the
projects when completed and any associated risks.

The final purchase price allocation is as follows
(in thousands):

|                                             |                      |   |       |       | 
|-------------------------------------------- | -------------------- | - | ----- | ----- | 
|Net tangible assets (liabilities)            |                      | $ | (203  | )    
|Acquired in-process research and development |                      |   | 270   |      
|Completed technologies                       |                      |   | 2,200 |      
|Assembled workforce                          |                      |   | 770   |      
|Customer base                                |                      |   | 590   |      
|Goodwill                                     |                      |   | 5,330 |      
|                                             |                      |   |       |      
|                                             | Total purchase price |   | $     | 8,957 | 
|                                             |                      |   |       |      

Tangible net assets acquired include cash,
accounts receivable, inventories and property and equipment.
Liabilities assumed principally include accounts payable,
accrued compensation and accrued expenses. A portion of the
purchase price has been allocated to developed technology and
acquired in-process research and development (IPR&D).
Developed technology and IPR&D were identified and valued
through extensive interviews, analysis of data provided by ATSI
concerning developmental products, their stage of development,
the time and resources needed to complete them, if applicable,
their expected income generating ability, target markets and
associated risks. The income approach, which includes an
analysis of the markets, cash flows and risks associated with
achieving such cash flows, was the primary technique utilized in
valuing the developed technology and IPR&D.

Where developmental projects had reached
technological feasibility, they were classified as developed
technology, and the value assigned to developed technology was
capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses,
they were classified as IPR&D and charged to expense upon
closing of the transaction. The nature of the efforts required
to develop the purchased IPR&D into commercially viable
products principally relate to the completion of all planning,
designing, prototyping, verification and testing activities that
are necessary to establish that the products can be produced to
meet their design specifications, including functions, features
and technical performance requirements.

In valuing the IPR&D, the Company considered,
among other factors, the importance of each project to the
overall development plan, projected incremental cash flows from
the projects when completed and any associated risks. The
projected incremental cash flows were discounted back to their
present value using a discount rate of 26%. The discount rate
was determined after consideration of the Companys
weighted average cost of capital and the weighted average return
on assets. Associated risks include the inherent difficulties
and uncertainties in completing each project and thereby
achieving technological feasibility, anticipated levels of
market acceptance and penetration, market growth rates and risks
related to the impact of potential changes in future target
markets.

At December 31, 2001, the Company recorded
an impairment charge of approximately $5.5 million related
to goodwill and other purchased intangible assets.

The following unaudited pro forma summary
presents the consolidated results of operations of the Company,
excluding the charge for IPR&D, as if the acquisition of
ATSI had occurred at the beginning of

51



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2000 and 2001 and does not purport to be
indicative of what would have occurred had the acquisition been
made as of those dates or of results which may occur in the
future.

|               |  |                           |         |      |  |   |         |  
|-------------- |  | ------------------------- | ------- | ---- |  | - | ------- | -
|               |  |                          
|               |  | December 31,             
|               |  |                          
|               |  | 2001                      |         | 2000
|               |  |                           |         |     
|               |  |                          
|               |  | (In thousands, except per
|               |  | share data)              
|Total revenue  |  | $                         | 17,830  |      |  | $ | 20,747  |  
|Net loss       |  |                           | (21,187 | )    |  |   | (10,262 | )
|Loss per share |  |                           | (1.11   | )    |  |   | (1.01   | )



|        |                      
|------- | ---------------------
|Note 3. | Restructuring Charges

In the fourth quarter of fiscal 2001, the Company
announced a restructuring program to downsize its organizational
structure in order to reduce its operating expenses and improve
workforce processes and efficiencies. As a result, the Company
recorded a charge of $384,000, which includes termination
benefits and related expenses of $362,000 related to a reduction
of the workforce by 22 employees, and termination benefits and
related expenses, and expenses of $22,000 for abandonment of
excess equipment. At December 31, 2002, all 22 employees
had been terminated, and the accrued restructuring liability was
zero. For the year ended December 31, 2002, cash payments
related to the restructuring program were $342,000.

On August 8, 2002, the Company announced its
intention to execute a restructuring program focused on
improving productivity, reducing operational expenses in remote
offices, and implementing a workforce reduction of approximately
20% of its existing worldwide employees. As a result, the
Company recognized a charge of $1.8 million in the third
quarter ended September 30, 2002. The charge includes
termination benefits and related expenses of approximately
$630,000 related to the reduction of the workforce by 44
employees, expenses of approximately $683,000 related to the
abandonment of excess equipment, expenses of approximately
$356,000 for the abandonment of excess leased facilities, and
expenses of approximately $133,000 for various other related
charges. At December 31, 2002, 20 of the 44 employees had
been terminated.

A summary of the restructuring charges is as
follows (in thousands):

|                                        |  |             |       |         |  |          |      |                   |  |   |      |   |  |   |     | 
|--------------------------------------- |  | ----------- | ----- | ------- |  | -------- | ---- | ----------------- |  | - | ---- | - |  | - | --- | 
|                                        |  |             |       |         |  |          |      | Accrued          
|                                        |  | Charge in   |       | Noncash |  | Cash     |      | Restructuring at 
|                                        |  | August 2002 |       | Charges |  | Payments |      | December 31, 2002
|                                        |  |             |       |         |  |          |      |                  
|Workforce reductions                    |  | $           | 630   |         |  | $        |     |                   |  | $ | (212 | ) |  | $ | 418 | 
|Abandonment of excess equipment         |  |             | 683   |         |  |          | (683 | )                 |  |   |     |   |  |   |    | 
|Abandonment of excess leased facilities |  |             | 356   |         |  |          |     |                   |  |   |     |   |  |   | 356 | 
|Other                                   |  |             | 133   |         |  |          |     |                   |  |   | (30  | ) |  |   | 103 | 
|                                        |  |             |       |         |  |          |      |                   |  |   |      |   |  |   |     | 
|Total                                   |  | $           | 1,802 |         |  | $        | (683 | )                 |  | $ | (242 | ) |  | $ | 877 | 
|                                        |  |             |       |         |  |          |      |                   |  |   |      |   |  |   |     | 

Remaining cash expenditures relating to workforce
reduction will be paid in the first half of 2003. Amounts
related to the abandonment of excess leased facilities will be
paid as the lease payments are due through the remainder of the
lease terms through 2004.

52



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
4.     Investments

Investments consist of the following (in
thousands):

|                            |                  |               |        |        |  |   |        |        | 
|--------------------------- | ---------------- | ------------- | ------ | ------ |  | - | ------ | ------ | 
|                            |                  |              
|                            |                  | Fair Value at
|                            |                  | December 31, 
|                            |                  |              
|                            |                  | 2002          |        | 2001  
|                            |                  |               |        |       
|Money market funds          |                  | $             | 23     |        |  | $ | 35     |       
|U.S. government obligations |                  |               | 23,906 |        |  |   | 54,235 |       
|                            |                  |               |        |        |  |   |        |       
|                            |                  | $             | 23,929 |        |  | $ | 54,270 |       
|                            |                  |               |        |        |  |   |        |       
|Reported as:                |                  |               |        |        |  |   |        |       
|                            | Cash equivalents |               | $      | 17,930 |  |   | $      | 14,634 | 
|                            | Investments      |               |        | 5,999  |  |   |        | 39,636 | 
|                            |                  |               |        |        |  |   |        |       
|                            |                  | $             | 23,929 |        |  | $ | 54,270 |       
|                            |                  |               |        |        |  |   |        |       

At December 31, 2002 and December 31,
2001, the maturity of investments was between one and twelve
months.

There were no material gross realized gains or
losses from sales of securities in the periods presented.
Unrealized gains were $6,000 and $173,000 at December 31,
2002 and 2001, respectively.

Note
5.     Inventories

Inventories consist of the following (in
thousands):

|                |  |              |       |      |  |   |       | 
|--------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                |  |             
|                |  | December 31,
|                |  |             
|                |  | 2002         |       | 2001
|                |  |              |       |     
|Raw materials   |  | $            | 4,514 |      |  | $ | 2,976 | 
|Work in process |  |              | 709   |      |  |   | 658   | 
|Finished goods  |  |              | 1,057 |      |  |   | 63    | 
|                |  |              |       |      |  |   |       | 
|                |  | $            | 6,280 |      |  | $ | 3,697 | 
|                |  |              |       |      |  |   |       | 



|        |                       
|------- | ----------------------
|Note 6. | Property and Equipment

Property and equipment consists of the following
(in thousands):

|                                               |  |              |        |      |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |        | 2001
|                                               |  |              |        |     
|Laboratory and office equipment                |  | $            | 7,362  |      |  | $ | 5,627  |  
|Property                                       |  |              | 2,088  |      |  |   |       |  
|Leasehold improvements                         |  |              | 1,243  |      |  |   | 1,215  |  
|                                               |  |              |        |      |  |   |        |  
|                                               |  |              | 10,693 |      |  |   | 6,842  |  
|Less accumulated depreciation and amortization |  |              | (5,772 | )    |  |   | (3,609 | )
|                                               |  |              |        |      |  |   |        |  
|Property and equipment, net                    |  | $            | 4,921  |      |  | $ | 3,233  |  
|                                               |  |              |        |      |  |   |        |  

Equipment leased under capital leases is included
in laboratory and office equipment. At December 31, 2002
and 2001, equipment under capital leases was approximately
$252,000 and $559,000 with accumulated amortization of
approximately $92,000 and $410,000, respectively.

53



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|        |            
|------- | -----------
|Note 7. | Commitments



| |                             
| | ----------------------------
| | Operating and capital leases

The Company leases its primary office and
research facilities in Foster City, California, an office
facility in Indianapolis, Indiana, an office facility in
Midland, Michigan and a research facility in Tucson, Arizona as
well as locations in Basel, Switzerland and Tokyo, Japan under
operating leases. The Company finances certain laboratory and
office equipment under capital leases. Future minimum annual
lease payments under all non-cancelable leases are as follows
(in thousands):

|                                            |  |                  |     |             |  |               |       |            |  |   |     |  |  |   |       | 
|------------------------------------------- |  | ---------------- | --- | ----------- |  | ------------- | ----- | ---------- |  | - | --- |  |  | - | ----- | 
|                                            |  |                 
|                                            |  | Operating Leases
|                                            |  |                 
|                                            |  |                  |     | Amounts     |  |              
|                                            |  |                  |     | Included in |  |              
|                                            |  | Capital          |     | Total Cash  |  | Restructuring |       | Remaining 
|Year Ending December 31,                    |  | Leases           |     | Obligation  |  | Liability     |       | Obligation
|                                            |  |                  |     |             |  |               |       |           
|2003                                        |  | $                | 88  |             |  | $             | 990   |            |  | $ | 206 |  |  | $ | 784   | 
|2004                                        |  |                  | 7   |             |  |               | 564   |            |  |   | 130 |  |  |   | 434   | 
|2005                                        |  |                  |    |             |  |               | 25    |            |  |   |    |  |  |   | 25    | 
|2006                                        |  |                  |    |             |  |               | 13    |            |  |   |    |  |  |   | 13    | 
|                                            |  |                  |     |             |  |               |       |            |  |   |     |  |  |   |       | 
|Total                                       |  | $                | 95  |             |  | $             | 1,592 |            |  | $ | 336 |  |  | $ | 1,256 | 
|                                            |  |                  |     |             |  |               |       |            |  |   |     |  |  |   |       | 
|Less amount representing interest           |  |                  | (2  | )           |  |               |       |            |  |   |     |  |  |   |       | 
|                                            |  |                  |     |             |  |               |       |            |  |   |     |  |  |   |       | 
|Present value of future lease payments      |  |                  | 93  |             |  |               |       |            |  |   |     |  |  |   |       | 
|Less current portion                        |  |                  | (88 | )           |  |               |       |            |  |   |     |  |  |   |       | 
|                                            |  |                  |     |             |  |               |       |            |  |   |     |  |  |   |       | 
|Noncurrent obligations under capital leases |  | $                | 5   |             |  |               |       |            |  |   |     |  |  |   |       | 
|                                            |  |                  |     |             |  |               |       |            |  |   |     |  |  |   |       | 



| |             
| | ------------
| | Rent expense

Rent expense under operating leases was
approximately $1.1 million, $1.2 million, and
$641,000, in 2002, 2001, and 2000, respectively.



| |      
| | -----
| | Other

The Company from time to time enters into certain
types of contracts that contingently require the Company to
indemnify parties against third party claims. These contracts
primarily relate to: (i) certain real estate leases, under
which the Company may be required to indemnify property owners
for environmental and other liabilities, and other claims
arising from the Companys use of the applicable premises;
and (ii) certain agreements with the Companys
officers, directors and employees, under which the Company may
be required to indemnify such persons for liabilities arising
out of their employment relationship.

The terms of such obligations vary. Generally, a
maximum obligation is not explicitly stated. Because the
obligated amounts of these types of agreements often are not
explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has
not been obligated to make significant payments for these
obligations, and no liabilities have been recorded for these
obligations on its balance sheet as of December 31, 2002.



|        |               
|------- | --------------
|Note 8. | Long-Term Debt

In connection with the acquisition of Jones
Group, the Company issued notes payable of approximately
$10.9 million. The notes payable are denominated in British
Pounds Sterling in the amount of £7,650,000
($10.9 million) and interest is payable to the note holders
at an initial rate of 3.9% per annum for the first twelve month
period (ending February 20, 2003), and subsequently at the
rate equal to the published base rate

54



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of Barclays Bank PLC on the date immediately
preceding each quarterly interest period, less any fees and
costs. Translated at December 31, 2002 the debt amount was
approximately $12.3 million. The notes mature in April
2004. The Company deposited cash in the amount of
£7,650,000 ($10.9 million) with Barclays Bank PLC
as collateral for the principal and interest on the notes
payable. The cash amount held as collateral is represented as
restricted cash in the Companys balance sheet and is
invested in money market instruments to yield rates approximate
to the interest rates due on the notes payable.

In connection with the acquisition of ATSI on
March 1, 2001, the Company assumed outstanding loan
liabilities of approximately $654,000, which were repaid in full
in April 2001.

The carrying amount for the Companys
long-term and short-term debt approximated fair value at each of
balance sheet dates. The fair value of the Companys debt
was estimated using discounted cash flow analyses, based on the
Companys current incremental borrowing rate for similar
types of borrowing arrangements.



|        |                     
|------- | --------------------
|Note 9. | Stockholders Equity



| |                            
| | ---------------------------
| | Convertible Preferred Stock

Pursuant to our charter, our board of directors
has the authority to issue up to 10,000,000 shares of preferred
stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any further vote of action by our stockholders.
At December 31, 2002 and 2001, zero shares were issued and
outstanding.



| |             
| | ------------
| | Common Stock

In February 2002, the Company issued 572,152
shares of unregistered common stock in connection with the
acquisition of Jones Group.

In March 2001, the Company issued 666,667 shares
of unregistered common stock in connection with the acquisition
of ATSI.

In July 2000, the Company completed its initial
public offering of 5,290,000 shares of common stock, inclusive
of the underwriters over-allotment option, at a price of
$15.00 per share. The Company received approximately
$72.5 million in net proceeds after underwriting discounts
of $5,554,000 and other offering costs of $1,337,000. In
conjunction with the initial public offering, the Company
effected a 0.88 for one reverse stock split of the common stock.
Upon the close of the initial public offering, all of the
outstanding convertible preferred stock was automatically
converted into 0.88 shares of common stock.



| |                                    
| | -----------------------------------
| | Common Stock Repurchase
    Program

On August 8, 2002, the Company announced the
approval by its Board of Directors of a stock repurchase program
pursuant to which shares of its outstanding common stock having
an aggregate value of up to $500,000 may be repurchased through
open market transactions at prices deemed appropriate by the
Company. The duration of the stock repurchase program is
open-ended. The timing and amount of repurchase transactions
under this program will depend on market conditions, corporate
and regulatory considerations, and will be funded from available
working capital. At December 31, 2002, the Company had
repurchased 50,000 shares of outstanding common stock at an
average price of $0.93 per share.



| |         
| | --------
| | Warrants

In conjunction with a capital lease line executed
in April 1995, the Company issued a warrant to purchase 44,000
shares of common stock at an exercise price of $1.36 per share.
The warrant was exercised in January 2001.

55



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In 1997, the Company issued a series of warrants
to purchase 30,799 shares of common stock at an exercise price
of $6.82 per share in connection with the execution of a capital
lease line and a loan and security agreement. These warrants
expire at various dates through December 2004. At
December 31, 2002, all of these warrants were still
outstanding.

In 1998, the Company issued two warrants to
purchase a total of 32,266 shares of common stock at an exercise
price of $6.82 per share in connection with two loan agreements
entered into in July 1998. These warrants expire in July 2005.
At December 31, 2002, all of these warrants were still
outstanding. The fair value of these warrants, determined using
a Black-Scholes valuation model, was $40,699 and has been
recorded as interest expense over the term of the respective
loan.

In 1999, the Company issued a warrant to purchase
17,600 shares of common stock at an exercise price of $6.82 per
share in connection with a draw down on one of its loans. The
warrant expires in January 2003. At December 31, 2002, this
warrant was still outstanding. The fair value of the warrant,
determined using the Black-Scholes valuation model, was $22,200
and has been recorded as interest expense over the term of the
loan.



| |                          
| | -------------------------
| | 1995 Incentive Stock Plan

The Companys 1995 Incentive Stock Plan (the
1995 Plan) provides for (i) the grant of
incentive stock options to employees, (ii) the grant of
non-statutory stock options to employees and consultants, and
(iii) the grant of stock purchase rights. A total of
3,464,179 shares of common stock have been authorized for
issuance under the 1995 Plan.

Under the terms of the 1995 Plan, the options and
purchase rights granted generally vest at a rate of 25% at the
end of the first year with the remaining balance vesting in
equal amounts over the next 36 months.



| |                          
| | -------------------------
| | 2000 Incentive Stock Plan

In April 2000, the Company adopted its 2000
Incentive Stock Plan (the 2000 Plan) and initially
reserved a total of 1,760,000 shares of common stock for
issuance. Under the terms of the 2000 Plan, the number of shares
reserved shall increase annually on the first day of the
Companys fiscal year beginning 2001 by the lesser of
(i) 1,320,000 shares, (ii) 5% of the outstanding
shares on such date or (iii) an amount determined by the
Board. The 2000 Plan provides for (i) the grant of
incentive stock options to employees, (ii) the grant of
non-statutory stock options to employees and consultants, and
(iii) the grant of stock purchase rights. The 2000 Plan
permits options and or purchase rights to be granted at an
exercise price of not less than 100% of the fair value on the
date of the grant. The vesting term of option and purchase
rights is

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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

determined by the Board of Directors and is
generally over four years. A summary of activity under the Plans
is as follows:

|                             |                              |           |           |            |   |          |           |            |   |  |      |      | 
|---------------------------- | ---------------------------- | --------- | --------- | ---------- | - | -------- | --------- | ---------- | - |  | ---- | ---- | 
|                             |                              |           |           |            |   | Weighted
|                             |                              | Shares    |           |            |   | Average 
|                             |                              | Available |           | Number of  |   | Exercise
|                             |                              | For Grant |           | Options    |   | Price   
|                             |                              |           |           |            |   |         
|Balance at December 31, 1999 |                              |           | 934,702   |            |   |          | 1,775,517 |            |   |  | 0.74 |     
|                             | Additional shares authorized |           |           | 1,760,000  |   |          |           |           |   |  |      |     | 
|                             | Options granted              |           |           | (671,613   | ) |          |           | 671,613    |   |  |      | 7.16 | 
|                             | Options exercised            |           |           |           |   |          |           | (659,077   | ) |  |      | 0.49 | 
|                             | Options canceled             |           |           | 171,786    |   |          |           | (171,786   | ) |  |      | 1.61 | 
|                             |                              |           |           |            |   |          |           |            |   |  |      |     
|Balance at December 31, 2000 |                              |           | 2,194,875 |            |   |          | 1,616,267 |            |   |  | 3.42 |     
|                             | Additional shares authorized |           |           | 913,466    |   |          |           |           |   |  |      |     | 
|                             | Options granted              |           |           | (1,712,575 | ) |          |           | 1,712,575  |   |  |      | 5.34 | 
|                             | Options exercised            |           |           |           |   |          |           | (187,030   | ) |  |      | 0.88 | 
|                             | Options canceled             |           |           | 331,066    |   |          |           | (331,066   | ) |  |      | 5.87 | 
|                             |                              |           |           |            |   |          |           |            |   |  |      |     
|Balance at December 31, 2001 |                              |           | 1,726,832 |            |   |          | 2,810,746 |            |   |  | 4.52 |     
|                             | Additional shares authorized |           |           | 964,084    |   |          |           |           |   |  |      |     | 
|                             | Options granted              |           |           | (2,479,896 | ) |          |           | 2,479,896  |   |  |      | 1.71 | 
|                             | Options exercised            |           |           |           |   |          |           | (92,769    | ) |  |      | 0.84 | 
|                             | Options canceled             |           |           | 1,135,741  |   |          |           | (1,135,741 | ) |  |      | 4.95 | 
|                             |                              |           |           |            |   |          |           |            |   |  |      |     
|Balance at December 31, 2002 |                              |           | 1,346,761 |            |   |          | 4,062,132 |            |   |  | 2.75 |     
|                             |                              |           |           |            |   |          |           |            |   |  |      |     

All options and shares were granted with exercise
prices equal to the fair value of the Companys common
stock on the date of grant. As of December 31, 2002,
information about options outstanding and options exercisable
was as follows:

|               |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|-------------- |  | ------------------- | --------- | ------------------- |  | -------- | ---- | --------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|               |  |                     |           |                     |  |         
|               |  | Options Outstanding |           |                    
|               |  |                     |           | Options Exercisable
|               |  |                     |           | Weighted            |  |          |      |          
|               |  |                     |           | Average             |  | Weighted |      |           |  | Weighted
|               |  |                     |           | Remaining           |  | Average  |      |           |  | Average 
|               |  | Number of           |           | Contractual         |  | Exercise |      | Number of |  | Exercise
|Exercise Price |  | Options             |           | Life (Years)        |  | Price    |      | Options   |  | Price   
|               |  |                     |           |                     |  |          |      |           |  |         
|$0.06-$1.41    |  |                     | 1,711,497 |                     |  |          | 8.40 |           |  | $        | 0.80  |  |  |  | 659,705   |  |  | $ | 0.79  | 
|$2.33-$5.68    |  |                     | 1,619,891 |                     |  |          | 8.95 |           |  | $        | 3.03  |  |  |  | 242,776   |  |  | $ | 4.01  | 
|$6.03-$8.38    |  |                     | 683,824   |                     |  |          | 8.22 |           |  | $        | 6.26  |  |  |  | 320,432   |  |  | $ | 6.27  | 
|$12.50-$20.13  |  |                     | 46,920    |                     |  |          | 7.78 |           |  | $        | 13.07 |  |  |  | 30,315    |  |  | $ | 13.14 | 
|               |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|               |  |                     | 4,062,132 |                     |  |          | 8.58 |           |  | $        | 2.75  |  |  |  | 1,253,228 |  |  | $ | 3.11  | 
|               |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 

There were 841,026 and 436,935 options
exercisable as of December 31, 2001 and 2000, respectively.

The weighted-average fair value of the stock
options granted were $1.71, $5.34, and $6.86 for the years ended
December 31, 2002, 2001 and 2000, respectively.

In 2000, the Company granted 86,592 options
outside of its options plans to certain employees and one
consultant at a weighted-average exercise price of $4.53. During
2001, 22,000 options were exercised with an exercise price of
$1.14 per share. As of December 31, 2002, all remaining
options outstanding had been cancelled.

57



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred stock compensation is the difference
between the exercise price of the options and the deemed fair
value of the common stock at the date of grant. The fair value
was determined based on the business factors underlying the
value of the Companys common stock on the date of grant
viewed in light of our initial public offering and the
anticipated initial public offering price per share. The
deferred stock compensation was recorded as a component of
stockholders equity and is being amortized over the
vesting periods of the options, generally four years, using the
graded vesting method. The Company recorded deferred stock
compensation of approximately $2.8 million in the year
ended December 31, 2000 and approximately $3.8 million
in the year ended December 31, 1999 in connection with the
grant of stock options to employees. The Company has recorded
amortization of deferred stock compensation of $222,000, $1.6
million, and $2.9 million, in the years ended
December 31, 2002, 2001 and 2000, respectively. As of
December 31, 2002, the Company had a total of $74,000 to be
amortized over the remaining vesting period of the options.

In 2000, the Company granted performance based
options to certain of its employees and recorded a stock
compensation expense of $86,000 on the date the performance
criteria were met and the options were vested. The Company has
granted options to consultants in exchange for services. Shares
granted totaled 62,000 in 2002, 22,000, in 2001 and 70,412 in
2000, The Company recorded compensation expense related to these
options of $49,000, $137,000, and $617,000, for the years ended
December 31, 2002, 2001 and 2000 respectively. In
accordance with SFAS 123 and EITF 96-18, options granted to
consultants are periodically revalued until exercised, cancelled
or forfeited.

2000 Employee
Stock Purchase Plan

In April 2000, the Company adopted its 2000
Employee Stock Purchase Plan (the Purchase Plan) and
initially reserved a total of 176,000 shares for issuance.
Under the terms of the Purchase Plan, the number of shares
reserved shall increase annually on the first day of the
Companys fiscal year beginning in 2001 by the lesser of
(i) 440,000 shares, (ii) 2% of the outstanding
shares on such date or (iii) a lesser amount determined by
the board. The Purchase Plan permits eligible employees to
purchase common stock at a discount through payroll during
defined offering periods. The price at which the stock is
purchased is equal to the lower of 85% of the fair market value
of the common stock on the first day of the offering or 85% of
the fair market value of the Companys common stock on the
purchase date. The initial offering period commenced on
November 1, 2000. During 2002, 119,096 shares were
issued under the stock purchase plan.

Reserved
Shares

As of December 31, 2002, the Company has
reserved shares of common stock for future issuance as follows:

|                             |  |  |           | 
|---------------------------- |  |  | --------- | 
|Warrants                     |  |  | 80,665    | 
|Incentive stock plans        |  |  | 5,408,893 | 
|Employee Stock Purchase Plan |  |  | 326,809   | 
|                             |  |  |           | 
|                             |  |  | 5,816,367 | 
|                             |  |  |           | 

Note 10.     401(k)
Retirement Savings Plan

The Company maintains a 401(k) retirement savings
plan for its full-time employees. Each participant in the Plan
may elect to contribute from 1% to 20% of annual compensation to
the Plan. The Company, at its discretion, may make contributions
to the Plan. The Companys expenses related to the Plan
have been immaterial. During 2002, in conjunction with the
acquisition of the Jones Group, the Company merged the 401(k)
plan of the Jones Group U.S. subsidiary, Jones
Chromatography U.S.A., Inc., into the Company plan.

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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 11.     Income
Taxes

The Company has a current provision for foreign
income taxes of $217,000 for the year ended December 31,
2002 related to its UK operations. There was no provision for
U.S. income taxes for any of the periods presented, due to
the Companys net operating losses. Foreign income from
continuing operations before income taxes was approximately
$301,000 in the year ended December 31, 2002.

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets are as follows:

|                         |                                      |                           |         |        |        |   |         |        |        | 
|------------------------ | ------------------------------------ | ------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                         |                                      |                          
|                         |                                      | December 31,             
|                         |                                      |                          
|                         |                                      | 2002                      |         | 2001  
|                         |                                      |                           |         |       
|Deferred tax assets:     |                                      |                           |         |        |        |   |         |       
|                         | Net operating loss carryforwards     |                           | $       | 17,500 |        |   | $       | 12,200 |       
|                         | Research credits                     |                           |         | 1,600  |        |   |         | 1,500  |       
|                         | Capitalized research and development |                           |         | 1,000  |        |   |         | 1,200  |       
|                         | Other                                |                           |         | 2,500  |        |   |         | 2,400  |       
|                         |                                      |                           |         |        |        |   |         |       
|                         |                                      | Total deferred tax assets |         |        | 22,600 |   |         |        | 17,300 | 
|                         |                                      |                           |         |        |        |   |         |       
|Valuation allowance      |                                      |                           | (22,600 | )      |        |   | (17,300 | )     
|                         |                                      |                           |         |        |        |   |         |       
|Net deferred tax assets: |                                      | $                         |        |        |        | $ |        |       
|                         |                                      |                           |         |        |        |   |         |       

Realization of deferred tax assets is dependent
upon future earnings, if any, the timing and amount of which are
uncertain. Accordingly, the net deferred tax assets have been
fully offset by a valuation allowance. The valuation allowance
increased by $5.3 million $4.4 million and
$2.4 million during 2002, 2001 and 2000 respectively.

As of December 31, 2002, the Company had net
operating loss carryforwards for federal income tax purposes of
approximately $49.0 million, which expire in the years 2011
through 2022 and federal research and development tax credits of
approximately $900,000, which expire in the years 2018 through
2022. As of December 31, 2001, the Company had net
operating loss carryforwards for state income tax purposes of
approximately $17.0 million which expire in the years 2005
through 2013 and state research and development tax credits of
approximately $920,000 which do not expire.

Utilization of the Companys net operating
loss may be subject to substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue
Code and similar state provisions. Such an annual limitation
could result in the expiration of the net operating loss before
utilization. As a result of California legislation, the
utilization of a substantial portion of the Companys
California state net operating loss carryforward is suspended in
2003.



|         |                                                          
|-------- | ---------------------------------------------------------
|Note 12. | Market Sales, Export Sales, and Significant
    Customers

The Company has determined that it operates in
only one segment in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS 131) as it only reports
profit and loss information on an aggregate basis to its chief
operating decision maker.

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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company had net sales by market as follows
(in thousands):

|            |  |                          |        |      |  |      |        |  |  |   |        | 
|----------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|            |  |                         
|            |  | Years Ended December 31,
|            |  |                         
|            |  | 2002                     |        | 2001 |  | 2000
|            |  |                          |        |      |  |     
|Instruments |  | $                        | 11,888 |      |  | $    | 11,151 |  |  | $ | 13,054 | 
|Consumables |  |                          | 11,106 |      |  |      | 4,130  |  |  |   | 3,762  | 
|Services    |  |                          | 3,323  |      |  |      | 1,782  |  |  |   | 633    | 
|            |  |                          |        |      |  |      |        |  |  |   |        | 
|            |  | $                        | 26,317 |      |  | $    | 17,063 |  |  | $ | 17,449 | 
|            |  |                          |        |      |  |      |        |  |  |   |        | 

The Company had net sales by geographical region
as follows (in thousands):

|                             |  |                          |        |      |  |      |        |  |  |   |        | 
|---------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                             |  |                         
|                             |  | Years Ended December 31,
|                             |  |                         
|                             |  | 2002                     |        | 2001 |  | 2000
|                             |  |                          |        |      |  |     
|US                           |  | $                        | 14,169 |      |  | $    | 11,739 |  |  | $ | 12,981 | 
|Europe                       |  |                          | 10,282 |      |  |      | 2,842  |  |  |   | 2,128  | 
|Far East (principally Japan) |  |                          | 1,866  |      |  |      | 2,482  |  |  |   | 2,340  | 
|                             |  |                          |        |      |  |      |        |  |  |   |        | 
|                             |  | $                        | 26,317 |      |  | $    | 17,063 |  |  | $ | 17,449 | 
|                             |  |                          |        |      |  |      |        |  |  |   |        | 

No single customer accounted for more than 10% of
total net sales during 2002, 2001, and 2000. Net sales are
attributed to countries based on the location of the customer.
During 2002, sales to customers in the United Kingdom accounted
for approximately 20% of net sales.

The Companys long-lived assets were
segmented by geography as follows (in thousands):

|         |  |              |        |      |  |   |       | 
|-------- |  | ------------ | ------ | ---- |  | - | ----- | 
|         |  |             
|         |  | December 31,
|         |  |             
|         |  | 2002         |        | 2001
|         |  |              |        |     
|US       |  | $            | 17,407 |      |  | $ | 5,084 | 
|Europe   |  |              | 16,371 |      |  |   | 287   | 
|Far East |  |              | 68     |      |  |   | 101   | 
|         |  |              |        |      |  |   |       | 
|         |  | $            | 33,846 |      |  | $ | 5,472 | 
|         |  |              |        |      |  |   |       | 

Note 13.     Unaudited
Quarterly Data

|                                    |  |                                       |        |               |  |          |        |           |  |              |        |               |  |          |        |           |  |   |         |   |  |   |        |   |  |   |        |   |  |   |        |  
|----------------------------------- |  | ------------------------------------- | ------ | ------------- |  | -------- | ------ | --------- |  | ------------ | ------ | ------------- |  | -------- | ------ | --------- |  | - | ------- | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                    |  | December 31,                          |        | September 30, |  | June 30, |        | March 31, |  | December 31, |        | September 30, |  | June 30, |        | March 31,
|                                    |  | 2002                                  |        | 2002          |  | 2002     |        | 2002      |  | 2001         |        | 2001          |  | 2001     |        | 2001     
|                                    |  |                                       |        |               |  |          |        |           |  |              |        |               |  |          |        |          
|                                    |  |                                      
|                                    |  | (In thousands, except per share data)
|Net sales                           |  | $                                     | 7,555  |               |  | $        | 7,282  |           |  | $            | 6,723  |               |  | $        | 4,757  |           |  | $ | 5,618   |   |  | $ | 3,583  |   |  | $ | 3,069  |   |  | $ | 4,793  |  
|Gross profit                        |  |                                       | 3,457  |               |  |          | 2,496  |           |  |              | 3,193  |               |  |          | 2,167  |           |  |   | 2,315   |   |  |   | 1,619  |   |  |   | 1,227  |   |  |   | 2,471  |  
|Loss from operations                |  |                                       | (2,337 | )             |  |          | (5,459 | )         |  |              | (3,263 | )             |  |          | (3,245 | )         |  |   | (10,430 | ) |  |   | (4,305 | ) |  |   | (5,169 | ) |  |   | (3,570 | )
|Net loss                            |  |                                       | (2,246 | )             |  |          | (5,338 | )         |  |              | (3,157 | )             |  |          | (3,117 | )         |  |   | (9,887  | ) |  |   | (3,722 | ) |  |   | (4,539 | ) |  |   | (2,647 | )
|Net loss per share, basic & diluted |  | $                                     | (0.11  | )             |  | $        | (0.27  | )         |  | $            | (0.16  | )             |  | $        | (0.16  | )         |  | $ | (0.51   | ) |  | $ | (0.19  | ) |  | $ | (0.24  | ) |  | $ | (0.14  | )

The first quarter fiscal 2001 net loss includes a
non-recurring charge of $270,000 for the write-off of acquired
research and development related to the Companys
acquisition of ATSI.

The fourth quarter fiscal 2001 net loss includes
a charge of $5.5 million for the write-down of purchased
intangible assets related to the ATSI acquisition, and
restructuring and other non-recurring charges of $384,000
composed primarily of $362,000 of severance and benefits charges.

60



---



##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The third quarter of fiscal 2002 net loss
includes restructuring and other non-recurring charges of
$2.6 million composed primarily of $630,000 in severance
and benefits charges, $683,000 in excess equipment charges,
$765,000 in the write-off of excess and obsolete inventory, and
$356,000 in facilities charges.

61



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this Item 10 is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on June 5, 2003.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item 11 is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on June 5, 2003.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this Item 12 is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on June 5, 2003.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this Item 13 is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on June 5, 2003.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Within the 90 days prior to the filing of
this report, the Company carried out an evaluation, under the
supervision and with the participation of its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures.
Based on this evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that its
disclosure controls and procedures are effective in timely
alerting them to material information required to be included in
this report. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.

There have been no significant changes in the
Companys internal controls or in other factors which could
significantly affect internal controls subsequent to the date
the Company carried out this evaluation.

62



---



##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) The following documents are filed as
part of this Form 10-K:

(1) Financial Statements:



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | The following financial statements are filed as
    part of this report under Item 8. Financial
    Statements and Supplementary Data.
|
| | Report of Independent Auditors                                                                                                          
|
| | Consolidated Balance Sheets                                                                                                             
|
| | Consolidated Statements of Operations                                                                                                   
|
| | Consolidated Statement of Shareholders
    Equity                                                                                      
|
| | Consolidated Statements of Cash Flows                                                                                                   
|
| | Notes to Consolidated Financial Statements                                                                                              

(2) Financial Statement Schedules:



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Schedule II  Valuation and
    Qualifying Accounts for the three fiscal years in the period
    ended December 31, 2002.

The following financial statement schedule of
Argonaut Technologies, Inc. for each of the past three years in
the period ended December 31, 2002 should be read in
conjunction with the Consolidated Financial Statements of
Argonaut Technologies, Inc.

Schedule II  Valuation and
Qualifying Accounts

Allowance for Doubtful Accounts (in
thousands)


|                             |  |            |     |                   |  |            |     |            |  |  |     |  |  |   |     | 
|---------------------------- |  | ---------- | --- | ----------------- |  | ---------- | --- | ---------- |  |  | --- |  |  | - | --- | 
|                             |  | Balance at |     | Additions Charged |  |            |     | Balance at
|                             |  | Beginning  |     | to Costs and      |  | Deductions |     | End of    
|                             |  | of Period  |     | Expenses          |  | Writeoffs  |     | Period    
|                             |  |            |     |                   |  |            |     |           
|Year Ended December 31, 2000 |  | $          | 50  |                   |  |            |    |            |  |  |    |  |  | $ | 50  | 
|Year Ended December 31, 2001 |  | $          | 50  |                   |  |            | 104 |            |  |  |    |  |  | $ | 154 | 
|Year Ended December 31, 2002 |  | $          | 154 |                   |  |            | 58  |            |  |  | 102 |  |  | $ | 110 | 

All other schedules have been omitted since the
required information is not present in amounts sufficient to
require submission of the schedule or because the information
required is included in the financial statements or notes
thereto.

(3) Exhibits:

|       |         |                         |  |                                                                                                                                                                                                                  
|------ | ------- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |         | Description of Document
|       |         |                        
|       | 2.1***  |                         |  | Agreement and Plan of Merger dated
    January 31, 2001, by and among the Registrant, CPL
    Acquisition Corp. and Camile Products, LLC.                                                                        
|       | 2.2**** |                         |  | Agreement for the sale and purchase of the entire
    issued share capital of Jones Chromatography Limited, dated
    February 11, 2002, by and among the Registrant and the
    former Jones Group shareholders.
|       | 3.1*    |                         |  | Amended and Restated Certificate of Incorporation
    of the Registrant.                                                                                                                                         
|       | 3.2*    |                         |  | Bylaws of Registrant.                                                                                                                                                                                            
|       | 4.3***  |                         |  | Registration Rights Agreement dated March 1,
    2001, by and among the Registrant and the members of Camile
    Products, LLC.                                                                                  
|       | 4.4**** |                         |  | Registration Rights Agreement dated
    February 20, 2002, by and among the Registrant and the
    former Jones Group shareholders.                                                                              
|       | 4.5**** |                         |  | £7,650,000 Loan Note Instrument Creating
    Principal Amount Guaranteed Loan Notes 2004 guaranteed by
    Barclays Bank PLC dated February 20, 2002.                                                            

63



---



##### Table of Contents



|       |            |                         |  |                                                                                                                                                           
|------ | ---------- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |            | Description of Document
|       |            |                        
|       | 10.1*      |                         |  | Amended and Restated Stockholder Rights
    Agreement, dated May 21, 1999.                                                                                
|       | 10.2*      |                         |  | Offer Letter, dated October 29, 1996, from
    Registrant to David P. Binkley, Ph.D.                                                                      
|       | 10.3*      |                         |  | Promissory Note Secured by Deed of Trust between
    the Registrant and David P. Binkley, dated December 17,
    1996.                                    
|       | 10.4*      |                         |  | Lease Agreement between the Registrant and
    Tanklage Family Partnership, dated July 9, 1999.                                                           
|       | 10.5*      |                         |  | Lease Agreement between the Registrant and MK
    Kojimachi Building Co., Ltd., dated September 16, 1997, as
    amended.                                 
|       | 10.6*      |                         |  | Lease Agreement between the Registrant and
    Personalvorsorgestiftung Rapp AG, dated April 16, 1997.                                                    
|       | 10.7*      |                         |  | License and Supply Agreement between the
    Registrant and Symyx Technologies, Inc., dated August 6,
    1999.                                           
|       | 10.8*      |                         |  | Manufacturing Agreement between the Registrant
    and Merck, Inc. dated June 24, 1997, as amended.                                                       
|       | 10.9*      |                         |  | Form of Indemnification Agreement between the
    Registrant and each of its directors and officers.                                                      
|       | 10.10*     |                         |  | 1995 Stock Plan.                                                                                                                                          
|       | 10.11*     |                         |  | 1995 Stock Plan Form of Stock Option Agreement.                                                                                                           
|       | 10.12*     |                         |  | 2000 Stock Incentive Plan.                                                                                                                                
|       | 10.13*     |                         |  | 2000 Employee Stock Purchase Plan.                                                                                                                        
|       | 10.14**    |                         |  | Amendment to License and Supply Agreement between
    the Registrant and Symyx Technologies, Inc., dated
    January 1, 2002.                             
|       | 10.15**    |                         |  | Agreement between the Registrant and David P.
    Binkley dated December 5, 2001.                                                                         
|       | 10.16**    |                         |  | Agreement between the Registrant and John T.
    Supan dated January 10, 2002.                                                                            
|       | 10.17***** |                         |  | License Agreement between Argonaut Technologies,
    Inc. and Symyx Technologies, Inc. dated August 21, 2002.                                             
|       | 10.18      |                         |  | Agreement between the Registrant and Jan K.
    Hughes dated December 9, 2002.                                                                            
|       | 23.1       |                         |  | Consent of Ernst & Young LLP, Independent
    Auditors.                                                                                                   
|       | 99.1       |                         |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|       | 99.2       |                         |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.



---



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Incorporated by reference from our registration
    statement on Form S-1, registration number 333-35782,
    declared effective by the Securities and Exchange Commission on
    July 18, 2000.



| |    |                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------
| | ** | Incorporated by reference from our Form 10-K
    filed with the Securities and Exchange Commission on
    April 1, 2002.



| |     |                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------
| | *** | Incorporated by reference from our Form 8-K
    filed with the Securities and Exchange Commission on
    March 16, 2001.



| |      |                                                                                                                        
| | ---- | -----------------------------------------------------------------------------------------------------------------------
| | **** | Incorporated by reference from our Form 8-K
    filed with the Securities and Exchange Commission on
    March 6, 2002.



|      |                                                                                                                                                                                                                                                                                                                                                
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|***** | Incorporated by reference from our Form 10-Q
    filed with the Securities and Exchange Commission on
    September 30, 2002. Certain portions of this exhibit have
    been omitted and filed separately with the Securities and
    Exchange Commission. Confidential treatment has been requested
    with respect to such omitted portions.

(b) Reports on Form 8-K

None.

64



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                            
| | ---------------------------
| | ARGONAUT TECHNOLOGIES, INC.



| |     |                         
| | --- | ------------------------
| | By: | /s/ LISSA A. GOLDENSTEIN

| |                                          
| | -----------------------------------------
| |                                          
| | Lissa A. Goldenstein                     
| | President and Chief Executive
    Officer

Dated: March 31, 2003

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Lissa A. Goldenstein, his or her true and lawful
attorneys-in-fact, each with full power of substitution, for him
or her in any and all capacities, to sign any amendments to this
report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                                           |  |                                                                          |  |                |  | 
|---------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | -------------- |  | 
|                                                           |  |                                                                          |  |               
|Signature                                                  |  | Title                                                                    |  | Date          
|                                                           |  |                                                                          |  |               
|                                                          
|/s/ LISSA A. GOLDENSTEINLissa A. Goldenstein               |  | Chief Executive Officer, Director
    (Principal Executive Officer)      |  | March 31, 2003
|                                                          
|/s/ DAVID J. FOSTERDavid J. Foster                         |  | Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | March 31, 2003
|                                                          
|/s/ BROOK H. BYERSBrook H. Byers                           |  | Director                                                                 |  | March 31, 2003
|                                                          
|/s/ HINGGE HSU, M.D.Hingge Hsu, M.D.                       |  | Director                                                                 |  | March 31, 2003
|                                                          
|/s/ BRIAN METCALF, PH.D.Brian Metcalf, Ph.D.               |  | Director                                                                 |  | March 31, 2003
|                                                          
|/s/ WILLIAM R. RASTETTER, PH.D.William R. Rastetter, Ph.D. |  | Director                                                                 |  | March 31, 2003
|                                                          
|/s/ PETER MACINTYREPeter Macintyre                         |  | Director                                                                 |  | March 31, 2003
|                                                          
|/s/ DAVID P. BINKLEY, PH.D.David P. Binkley, Ph.D.         |  | Chairman, Director                                                       |  | March 31, 2003

65



---



##### Table of Contents



CERTIFICATION UNDER SECTION 302(a) OF THE
SARBANES-OXLEY ACT OF 2002

I, Lissa A. Goldenstein, President and Chief
Executive Officer of Argonaut Technologies, Inc., certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Argonaut Technologies,
    Inc.;                                                                                                                                                                                                                                                         
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ LISSA A. GOLDENSTEIN                 
| |                                          
| | Lissa A. Goldenstein                     
| | President and Chief Executive
    Officer

Date: March 31, 2003

66



---



##### Table of Contents



I, David J. Foster, Chief Financial Officer of
Argonaut Technologies, Inc., certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Argonaut Technologies,
    Inc.;                                                                                                                                                                                                                                                         
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                                   
| | --------------------------------------------------
| | /s/ DAVID J. FOSTER                               
| |                                                   
| | David J. Foster                                   
| | Sr. Vice President and Chief Financial
    Officer

Date: March 31, 2003

67



---



##### Table of Contents






EXHIBIT INDEX

|       |            |                         |  |                                                                                                                                                                                                                  
|------ | ---------- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |            | Description of Document
|       |            |                        
|       | 2.1***     |                         |  | Agreement and Plan of Merger dated
    January 31, 2001, by and among the Registrant, CPL
    Acquisition Corp. and Camile Products, LLC.                                                                        
|       | 2.2****    |                         |  | Agreement for the sale and purchase of the entire
    issued share capital of Jones Chromatography Limited, dated
    February 11, 2002, by and among the Registrant and the
    former Jones Group shareholders.
|       | 3.1*       |                         |  | Amended and Restated Certificate of Incorporation
    of the Registrant.                                                                                                                                         
|       | 3.2*       |                         |  | Bylaws of Registrant.                                                                                                                                                                                            
|       | 4.3***     |                         |  | Registration Rights Agreement dated March 1,
    2001, by and among the Registrant and the members of Camile
    Products, LLC.                                                                                  
|       | 4.4****    |                         |  | Registration Rights Agreement dated
    February 20, 2002, by and among the Registrant and the
    former Jones Group shareholders.                                                                              
|       | 4.5****    |                         |  | £7,650,000 Loan Note Instrument Creating
    Principal Amount Guaranteed Loan Notes 2004 guaranteed by
    Barclays Bank PLC dated February 20, 2002.                                                            
|       | 10.1*      |                         |  | Amended and Restated Stockholder Rights
    Agreement, dated May 21, 1999.                                                                                                                                       
|       | 10.2*      |                         |  | Offer Letter, dated October 29, 1996, from
    Registrant to David P. Binkley, Ph.D.                                                                                                                             
|       | 10.3*      |                         |  | Promissory Note Secured by Deed of Trust between
    the Registrant and David P. Binkley, dated December 17,
    1996.                                                                                           
|       | 10.4*      |                         |  | Lease Agreement between the Registrant and
    Tanklage Family Partnership, dated July 9, 1999.                                                                                                                  
|       | 10.5*      |                         |  | Lease Agreement between the Registrant and MK
    Kojimachi Building Co., Ltd., dated September 16, 1997, as
    amended.                                                                                        
|       | 10.6*      |                         |  | Lease Agreement between the Registrant and
    Personalvorsorgestiftung Rapp AG, dated April 16, 1997.                                                                                                           
|       | 10.7*      |                         |  | License and Supply Agreement between the
    Registrant and Symyx Technologies, Inc., dated August 6,
    1999.                                                                                                  
|       | 10.8*      |                         |  | Manufacturing Agreement between the Registrant
    and Merck, Inc. dated June 24, 1997, as amended.                                                                                                              
|       | 10.9*      |                         |  | Form of Indemnification Agreement between the
    Registrant and each of its directors and officers.                                                                                                             
|       | 10.10*     |                         |  | 1995 Stock Plan.                                                                                                                                                                                                 
|       | 10.11*     |                         |  | 1995 Stock Plan Form of Stock Option Agreement.                                                                                                                                                                  
|       | 10.12*     |                         |  | 2000 Stock Incentive Plan.                                                                                                                                                                                       
|       | 10.13*     |                         |  | 2000 Employee Stock Purchase Plan.                                                                                                                                                                               
|       | 10.14**    |                         |  | Amendment to License and Supply Agreement between
    the Registrant and Symyx Technologies, Inc., dated
    January 1, 2002.                                                                                    
|       | 10.15**    |                         |  | Agreement between the Registrant and David P.
    Binkley dated December 5, 2001.                                                                                                                                
|       | 10.16**    |                         |  | Agreement between the Registrant and John T.
    Supan dated January 10, 2002.                                                                                                                                   
|       | 10.17***** |                         |  | License Agreement between Argonaut Technologies,
    Inc. and Symyx Technologies, Inc. dated August 21, 2002.                                                                                                    
|       | 10.18      |                         |  | Agreement between the Registrant and Jan K.
    Hughes dated December 9, 2002.                                                                                                                                   
|       | 23.1       |                         |  | Consent of Ernst & Young LLP, Independent
    Auditors.                                                                                                                                                          
|       | 99.1       |                         |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                       
|       | 99.2       |                         |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                       



---



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Incorporated by reference from our registration
    statement on Form S-1, registration number 333-35782,
    declared effective by the Securities and Exchange Commission on
    July 18, 2000.



| |    |                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------
| | ** | Incorporated by reference from our Form 10-K
    filed with the Securities and Exchange Commission on
    April 1, 2002.



---



##### Table of Contents





| |     |                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------
| | *** | Incorporated by reference from our Form 8-K
    filed with the Securities and Exchange Commission on
    March 16, 2001.



| |      |                                                                                                                        
| | ---- | -----------------------------------------------------------------------------------------------------------------------
| | **** | Incorporated by reference from our Form 8-K
    filed with the Securities and Exchange Commission on
    March 6, 2002.



|      |                                                                                                                                                                                                                                                                                                                                                
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|***** | Incorporated by reference from our Form 10-Q
    filed with the Securities and Exchange Commission on
    September 30, 2002. Certain portions of this exhibit have
    been omitted and filed separately with the Securities and
    Exchange Commission. Confidential treatment has been requested
    with respect to such omitted portions.